InvestorQ : What are trend lines and how can trader use them to play trades in the market?
Aashna Tripathi made post

What are trend lines and how can trader use them to play trades in the market?

Tisha Malhotra answered.
2 years ago

One of the common pieces of wisdom in the market is that the trend is always your friend. The trader should never try to outsmart the market but trade within the confines of the signals given by the market. An uptrend or downtrend provides several reliable opportunities to catch these trends well in advance and make profits. During these kinds of market behaviour, trend lines can be a very most reliable technical tool.

What are trend lines and how are they drawn? Trend lines are drawn simply by connecting the recent highs or lows of price action. To be specific, an uptrend line or ascending trend line is drawn by connecting the latest lows with a straight line. A downtrend line or descending trend line is created by connecting the latest highs with a straight line. Let us look at the ascending trend line and the descending trend line in great detail.

An ascending trend line tends to act as support for price action if the uptrend continues. Price often pulls back to the rising support level and bounces if buying momentum remains strong. The creation of new highs indicates that the uptrend will carry on. On the other hand, a descending trend line is treated as resistance for price action if the downtrend is strong. Price often pulls back to the falling resistance level and bounces if selling momentum carries on. The formation of new lows suggests that the selloff is likely to continue.

Cut through structures are equally important in this case. As with other types of inflection points, a break above the falling trend line resistance indicates that the downtrend may be over and that a reversal could take place. Conversely, a break below a rising trend line support suggests that the uptrend is about to turn. These can be very important signals for a chartist and also for a trader.