#2 - Chapter 13 of 35:
Here is a small sample from this chapter.
First let’s look at the trend line. I am sure everyone has heard the axiom “the trend is your friend,” but not everyone truly understands how to draw a trend line and how to profit from it. One of the basic tenets of TA is that prices move in trends – up, down and sideways.
Once we identify a trend how do we target solid entry and exit points? The simplest and most effective way is by drawing a trend line. A trend line is simply a straight line drawn on the chart connecting either the price lows for an uptrend or the price highs for a downtrend. We need only two points to draw a proper upward trend line.
- Start by marking the major low, which is the point preceding just below the highest high on the chart. This is known as the anchor point and will only change when the stock moves to a new high.
- Find and mark the lowest low of the current upward move within the trend. This point is moveable to the lows above it if there is price interference.
- Now connect these two points to form your upward trend line. There should be minimal price interference between the two points.
The key point to remember is that the upward trend line is an ever-changing indicator. It must be adjusted with every new high. The lowest low should be moved up to the next low if price interferes with the trend line. Trend lines help traders understand the flow of money into the stock and offer a visual way to identify entry points. A trader should focus on buying the declines toward the upward trend line.
same formula is used in reverse for drawing a downtrend line. First find
the lowest low on the chart and mark the preceding high as the major
high. Next find and mark the highest low or rally on the chart. Connect
the two points Ė the major high and the highest low Ė to form your trend
be too concerned with dangling prices above or below your trend line;
thatís just price interference, which is why we use the major price
points to form our line. Those major points indicate the areas where a
major reversal in sentiment took place and form strong resistance points
for traders to overcome.
that a trend line is just a line drawn by you and other traders on a
chart. The line that I draw may be different from a line someone else
draws. The point is just because I draw a seemingly logical trend line
that doesnít mean the stock will adhere to the line as I believe it
should. No one else knows where I have put my trend line.
price action will determine where the stock will go, however, trend
lines work partly because many traders are using them and the traders
remember previous prices peaking and bottoming in a certain areas. This
allows traders to anticipate areas where greed and fear create reversals
in the price action.
There are two things to look for when determining an upward trend line break. First there is the initial break (point A). This occurs when a stock breaks below its upward trend line. The second condition to watch for is the first pullback (point B). This occurs when a stock moves back toward the trend line and fails to reach the upward line.
When a stock has met these two conditions, it has actually moved from a phase two uptrend to a phase three sideways trend. This action is followed by a breakdown into a phase four downtrend (point C).
On the other hand, there are two things to look for when determining a downward trend line break. First there is the initial break (point A). This occurs when a stock breaks above its downward trend line. The second condition to watch for is the first pullback (point B). This occurs when a stock moves back toward the trend line and fails to reach the downward line.
When a stock has met these two conditions, it has actually moved from a phase four downtrend to a phase one sideways trend. This action is followed by a breakout into a phase two uptrend (point C).
Key point: An upward or downward trend line break offers the trader the first signs of a possible change in the cycle. This will prepare the trader for what may come next.
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