Trend Lines: What They Are, And How To Use Them A trend line is created when you connect price highs or price lows using a straight line. This can be used an all different timeframes, but the most common method is using this to analyze stock charts on the daily scale. The most reliable trend lines provide a visual indication of price congestion and show exactly where support and resistance are for the stock. In an uptrend, you will often see prices hit a new high and then have a minor correction. When prices resume their upward motion, the stock will often stall out again at the previous high and correct again. This process can continue for just a few days up to many months. The result is a clear line in the sand if you will of where resistance is for that stock. Connecting the price highs from left to right on the daily scale of the stock chart will show you a clear horizontal trend line that is serving as strong resistance. The more times the stock bounces against this trend line, the more likely it is to break through forcefully and catapult the stock much higher. This is what is called a breakout and volume should expand dramatically when this happens. Traders that are long a stock will make handsome returns during this action.

The same technique for establishing trend lines can be used on stocks and markets that are in a downtrend. As the stock makes new lows, often times it will start to find support at a certain price level and then you will see that stock have a nice bounce. This does not necessarily mean the stock has found its true bottom. Shortly after the price advance, the stock will often roll over and come right back down to the previous low where it will bounce nicely again. As with the stock in the uptrend that continues to find resistance at a given level, the stock in the downtrend is consistently finding support at a given level. Over time, if you connect these price lows on the daily stock chart, you will see a clear trend line where the stock consistently finds support. The bad news is (good if you are short), is that the more times the stock touches this support level, the more likely it is to break that support level, and it can be dramatic. You often see the support break and prices plunge while volume accelerates. This is what is called a breakdown and can lead to large gains for short sellers during this time.

If you have been visualizing what has been described above and you are familiar with stock chart patterns, you probably have already come to the conclusion that the first example is that of an ascending triangle where prices make a consistent high, while higher lows are made. The second example is that of a descending triangle where prices make consistent lows while lower highs are made. These are two of the more basic examples of chart patterns. You can think of chart patterns as geometrical shapes that appear on stock charts when you use trend lines to draw in support and resistance. This practice has lead to many identifiable chart patterns that we will delve into. For now, we have learned the basics of how to draw horizontal and angled trend lines which are the basis of support and resistance, and will lead to the formation of many identifiable chart patterns that will provide great risk / reward entry and exit points for stocks.