What is a Trend and How to Define It

An uptrend is defined by a line. Trend lines

Trend lines

Additional Resources Trend Lines As technical analysis is built on the assumption that prices trend, the use of trend lines is important for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.

Many of the principles applicable to support and resistance levels can be applied to trend lines as well. It is important that you understand all of the concepts presented in our Support and Resistance article before continuing on.

We always want to trade with the trend, going against the trend is like trying to swim up-current. Trends and Trendlines Trendlines are an important tool in your toolbox as a Forex analyst and trader because they project price levels where the market is likely to bounce. If you can draw trendlines correctly you will be able to define buy and sell zones and maximize your trading potential. Both uptrends and downtrends can be defined by three primary trendlines: the inner trendline, the outer trendline, and the outer long-term trendline. Finding Your Inner, Outer, and Long-term Outer Trendlines in an Uptrend An uptrend is a series of price swings where the market is making higher highs and higher lows.

Definition Uptrend Line An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope.

What is a Trend and How to Define It

Note that at least three points must be connected before the line is considered to be a valid trend line. Uptrend lines act as support and indicate that net-demand demand less supply is increasing even as the price rises.

Partner Center Find a Broker An uptrend is an overall move higher in price, created by higher highs and higher lows. It describes when the price is moving upward or getting higher. The uptrend is therefore composed of higher swing lows and higher swing highs.

A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of the buyers.

As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent. An uptrend is defined by a line Line A downtrend line has a negative slope and trust trade option formed by connecting two or more high points.

Uptrend and Downtrend: What They Are and How to Trade in Each Scenario

The second high must be lower than the first for the line an uptrend is defined by a line have a negative slope. Downtrend lines act as resistance, and indicate that net-supply supply less demand is increasing even as the price declines. A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers.

As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.

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For a detailed explanation of trend changes, which are different than just trend line breaks, please see our article on the Dow Theory. Scale Settings High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a large change in price. Most charting programs allow users to set the scale as arithmetic or semi-log.

Trends and Trendlines | Uptrend Definition & Examples in The Forex Market

An arithmetic scale displays incremental values 5,10,15,20,25,30 evenly as they move up the y-axis. A semi-log scale displays incremental values in percentage terms as they move up the y-axis.

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In the case of Amazon. These false breakouts could have led to premature buying as the stock continued to decline after each one. The semi-log scale reflects the percentage loss evenly, and the downtrend line was never broken. In the case of EMC, there was a large price change over a long period of time.

They are used to give indications as to the immediate trend and indicate when a trend has changed. They can also be used as support and resistance and provide opportunities to open and close positions.

While there were not any false breaks below the uptrend line on the arithmetic scale, the rate of ascent appears smoother on the semi-log scale. EMC doubled three times in less than two years. On the semi-log scale, the trend line fits all the way up.

Trend Lines

On the arithmetic scale, three different trend lines were required to keep pace with the advance. Validation It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. It can sometimes be difficult to find more than 2 points from which to construct a trend line. Even though trend lines are an important aspect of technical analysis, it is not always possible to draw trend lines on every price chart.

Uptrend Line

Sometimes the lows or highs just don't match up, and it is best not to force the issue. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity. After the third touch in Nov, the trend line was considered a valid line of support. Now that the stock has bounced off of this level a fourth time, the soundness of the support level is enhanced even more.

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As long as the stock remains above the trend line supportthe trend will remain in control of the bulls. A break below would signal that net-supply was increasing and that a change in trend could be imminent.

Spacing of Points The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together.

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The most suitable distance apart will depend on the timeframe, the degree of price movement, and personal preferences.

If the lows highs are too close together, the validity of the reaction low high may be in question. If the lows are too far apart, the relationship between the two points could be suspect. An ideal trend line is made up of relatively evenly spaced lows or highs. The trend line in the above MSFT example represents well-spaced low points.

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On the Wal-Mart WMT example, the second high point appears to be too close to the first high point for a valid trend line; however, it would be feasible to draw a trend line beginning at point 2 and extending down to the February reaction high.

Angles As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance or decline over a brief period of time.

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The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level.