So in the previous articles we have already understood what trends in stock market are and how important it is to trade with the trend , we have also understood in the previous articles that trendline in technical analysis is an area of value , an area of value is an important place on a technical chart where the stock has a tendency to revert from , trendline is one of the various area of values ,trendline is a diagonal line that we draw on the chart by connecting the lows or highs depending on the market trend.
Below we will learn how to draw trendlines correctly on a technical chart in each case whether it is in uptrend or downtrend, drawing trendline is possible only if the stock is in uptrend or downtrend that is if it is bearish or bullish , in sideways trend the stock will move between support and resistace levels which we will discuss in future articles.
1.Stock is in Uptrend –
We know what an uptrend or bull market means , a stock is in uptrend when it forms higher highs and higher lows , that is each peak is higher than previous one and each trough is also higher than the previous one , in drawing a trendline on the technical chart it is important to touch the lows or troughs only , the more touches the better so you draw a line connecting the higher lows of a stock in uptrend , see below example of LalPath Labs as on NSE (Nifty)-
Look at how i have connected all the higher lows or troughs of the trend hence making a diagonal line , see how everytime the stock just reverts from the trendline and moves higher thus establishing it’s importance as an area of value , you should always look for opportunities to buy near the trendline in such uptrends or bullish phases.
2. Stock is in Downtrend –
We know a downtrend or bear market is when a stock begins to form lower highs and lower lows on a technical chart , that is peaks are lower than the previous ones and troughs are also lower than previous one,we draw a trendline in a downtrend by connecting the lower highs or lower peaks on the chart , see below visual example of Ashok Leyland as on NSE (Nifty)-
See how i have drawn the trendline by connecting the lower highs each time in the downtrend , sometimes the candlestick patterns might just brush the trendline on technical chart and not make a contact but that is fine just try to make as much touches as possible , always look for opportunities to sell at trendline in the downtrend or bearish phase.
3. Trendline Channel –
A trendline channel is formed sometimes , if formed in the uptrend you can draw a trendline connecting the higher highs also instead of just higher lows hence forming the trend channel.Lets take a look at visual example below of Ashok Leyland on NSE (Nifty)-
See how i have connected higher highs also not just higher lows in the uptrend and formed the channel , you can trade the channel and short at the upper line of the channel and buy at the lower end of the channel , but i personally don’t like to short in uptrend or bullish market so it’s a matter of choice , if you want to take some more risk you can short at the upper end of the channel in uptrend of the stock.
So we have had a thorough understanding of trendlines and how to draw them properly , trendline only can’t be made in sideway market trends , in bearish and bullish stock they can be a very important part of your trading strategy and must be deployed to take advantage of the trend and ride the swings or trends in the stock.