Trend Lines
What this domain tests
Trend-line questions check whether you can anchor a line to meaningful swing points, judge its validity and use a break without confusing it with a full trend reversal.
Core rules
- An uptrend line joins two rising swing lows; a downtrend line joins two falling swing highs. Extend the line to the right and treat the third independent touch as validation.
- Draw through the price area that best represents the swings; many end-of-day analysts use closing prices, while intraday traders may use wicks. Be consistent.
- The slope should be moderate: a line that is nearly vertical breaks easily and is not a durable trend filter.
- A channel adds a parallel line through the opposite swings; a channel break warns of acceleration or reversal, not automatically both.
- A trend-line break needs a close beyond the line, ideally with volume. A break of a steep line often means consolidation, not a new downtrend.
- Log charts are preferred for long-term comparisons because equal percentage moves look equal; linear charts distort long horizons.
Worked example
A stock bottoms at 40, rises to 50, pulls back to 44, advances to 56, and pulls back to 48. A line through 40 and 44 projects to 48 at the third low; the touch and rebound validate it. A trader buys near 49 with a stop below 47.5, risking 1.5 points. A close below 47.5 breaks the line, but a higher low above 44 would still leave the broader uptrend intact.
Traps
- Connecting two arbitrary points and treating every touch as a signal.
- Ignoring the time frame: a line that is valid on 15-minute data may be noise on a daily chart.
- Assuming a trend-line break is a reversal rather than a possible pause.
- Drawing lines after the fact to fit known turning points.