Trendline Tool

Out of the charting tools that I tend to use most frequently, the Trendline Tool is the easiest tool to place on a stock chart. The appealing nature of the Trendline Tool is its simplicity. Even the most green, newest beginner can use and apply a Trendline Tool with better than average success. In this section though, I hope to show you some more advanced techniques when using Trendlines.

Before I begin, let’s summarize the different types of Trendlines. Here at Trendy Stock Charts, I mostly talk about 3 types of Trendlines – Supporting Trendlines, Resistance Trendlines and Main Supporting Trendlines.

Supporting Trendline – a trendline that is found below or lower than a stock’s current share price

Resistance Trendline – a trendline that is found above or higher than the stock’s current share price

Main Supporting Trendline – a trendline that has been respected since the stock’s current uptrend began

The reason I don’t include Main Supporting Trendlines with the Supporting Trendline group is that I have some slightly different rules for Main Supporting Trendlines. Therefore it is important to distinguish between a regular Supporting Trendline and a Main Supporting Trendline.

Components

The various components for a Trendline Tool include:

2 Anchor Points – Anchor Points are used to place the Trendline Tool on a stock chart.

Trendlines – A straight line (trendline) is automatically drawn between the 2 Anchor Points as the 2 Anchor Points are being placed on the stock chart.

The illustration shows 2 different trendlines, 1 for a downtrend and 1 for an uptrend. Their Anchor Points and their resulting Trendlines would look something like this:

Just like the other Charting Tools I cover, the Trendline Tool can be used on candlestick charts covering different lengths of time such as 5 minute charts, hourly charts, daily charts, weekly and even monthly charts.

Chart Placement

Pull up a candlestick chart of a stock that is trending upwards in order to determine where its main supporting Trendline is positioned.[s2If !current_user_can(access_s2member_level1)]……

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Make sure you have the entire uptrend viewable in the chart.

Next, select the Trendline Tool from your trading platform’s list of charting tools.

Start by going to the lowest share price on the stock chart. Place Anchor Point #1 for the Trendline on this lowest price point. “Placing” an Anchor Point is performed by left clicking the mouse at the price level and area you want the Anchor Point placed.
Now scan to the right of Anchor Point #1 and look for an uptrend and subsequent pullback. Place Anchor Point #2 at the at the low point of the pullback with another left mouse click.

After both Anchor Points have been placed on the stock chart, the Trendline is then projected. This Trendline represents the lowest that I would anticipate the stock’s share price to go. The lowest Trendline I expect a share’s price to go is what I consider the main supporting Trendline.

A break of a main supporting Trendline could be either a buy signal or a sell signal, depending upon the volume during the break and the subsequent share price activity.

Tips & Warnings

Draw Multiple Trendlines

Mix Closes With Intra-Day Highs/Lows

When attempting to place a Trendline on a stock chart, I usually try to incorporate as many lows and pullbacks as I can with the Trendline placement.

When Resistance Turns Into Support

Sell Main Supporting Trendline Breaks

Supporting Trendline breaks on light selling volume could be considered an opportunity to purchase shares (or additional shares) of a stock. But when a stock’s share price breaks through a supporting Trendline by closing below the Trendline on heavy selling volume, then as a defensive measure I usually lock in gains.

There are typically other selling indicators that happen before a supporting Trendline break, but if those sell signals aren’t identified early enough, the supporting Trendline breaks on heavy selling volume usually convinces me its time to lock in gains and watch the share price from the sidelines.

The Confidence Trade Set-Up

I define a Confidence Trade Set-Up when there are 3 or more technical analysis methods that all point towards the same price objective. Any combination of 3 technical analysis methods will work, such as Candlestick Analysis, Fibonacci Analysis and P&F Charting. But here are a couple of specific combinations of Charting Tools that give me the greatest confidence to go long and execute a share purchase when they are all confirming a trend reversal in the same area:

A Fibonacci Retracement Tool, a Fibonacci Fan Tool and a Bullish Reversal Candlestick Pattern.
A Fibonacci Retracement Tool, a Main Supporting Long-Term Trendline and a Bullish Reversal Candlestick Pattern.
A Fibonacci Retracement Tool, a 20 Day or 50 Day Moving Average and a Bullish Reversal Candlestick Pattern.
A Fibonacci Fan Tool, a 20 Day or 50 Day Moving Average and a Bullish Reversal Candlestick Pattern.

Adding a 4th or 5th technical analysis method of confirmation starts to really get me excited….and when the potential trade has a Risk to Reward Ratio that is 1:3 or better along with a 5 method Confidence Trade Set-Up, holy cow! Those sort of set-ups usually encourage me to risk larger percentages of my total portfolio on the trade!

Practice, Yes Practice

Did Michael Jordan become better without practice? I don’t think so…What about Walter Payton? (Can you tell I’m from Chicago?) The greats don’t become great without practice. Your portfolio will not see great gains that you anticipate without some practice. Practicing with old chart history works with every type of Charting Tool, especially Trendlines.

Trendlines are key tools in helping to determine a share price’s support and resistance areas. Placing the Trendline Tool on dozens of older charts can give you practice with the support and resistance Trendline identification areas. Practicing is what helped me tremendously and I’m sure it will do the same for you too.