|Fig 1 (courtesy-www.moneycontrol.com)|
By definition,Trend line is a line drawn on a chart of a security(stock,commodity,currency etc) or Index by joining the upper or lower price points.Trend line depicts the trend of the security and helps to predict the future price movements.
Trend lines may of several types like Linear,Exponential,Polynomial,Moving Average or Logarithmic but we shall talk only of Linear Trend line only as it is most commonly used by the trader and is more accurate in predicting the future prices.
We can draw the trend line for both, up trending security and a down trending security.In an up trending security,a trader is willing to buy it so as to take the advantage of the trend but he is reluctant to buy it near the top.Risk is that prices have the tendency to retrace back before moving higher.
So,he will draw a trend line on the chart in such a way that it joins maximum number of low prices touched by that security.You can see in Fig1,there is a daily chart of Heromotocorp stock which is in continuous uptrend since July,2013.We have drawn a line joining the lower points which we can continue to extend further as more prices appear on the chart.In an up trending stock,prices are bound to move higher and in order to capture maximum move,the look will look to buy it at dips.At how much dip? Trend line helps to decide that.
You see whenever prices retrace after moving higher,they continue to bounce from the trend line.So,we can a trade by buying the security when it comes closer to the trend line in anticipation that prices will rise again.We will be riding the trend till our targets are met or the security closes below the trend that is the closing price of the security is below the line in a trading session.Thus,trend line act as support for a security and the stock moves higher,support also moves higher and so moves your stop loss.
Similarly, Fig 2 shows the daily chart of down trending State Bank Of India ( SBI ) stock where the stock tries to move higher and retraces back after striking the trend line.So short selling traders enter the trade when stock moves higher and comes near the trend line, anticipating further price fall.Here also,the trend line acts as resistance point for the price and traders enjoy the move till stock remains below the trend line.