How to Identify Trends Perfectly Every Time
Drawing lines on chart has been a matter of contention for years.
There are fundamental analysts that despise the very idea that studying wiggles and lines on a chart can lead to rewarding payouts.
In fact, Warren Buffett once noted that, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.”
And that’s okay. We’re not about to argue with a man worth $76.1 billion this year.
He is wrong, though.
As a matter of fact, technical analysis can help us determine strength, weakness and overall trend especially if you can draw simple trend lines. As the name implies, trend lines help us determine trend. They can help us determine points of support and resistance, as well as direction. They can also help us identify potential areas of increasing or decreasing supply and demand, which can cause a stock to move up or down.
Let’s look at NVIDIA (NVDA) for example. Notice how the stock touches off of trend lines support several times over an extended period of time. This line represents a strong area of support where traders have been able to look for buying opportunities.
An uptrend has a positive slope and is formed by connecting two or more low points. The second point must be higher than the first point for the line to be considered a positive slope. As long as the trend line remains intact, as it has done with NVDA, it acts as a support line. As long as the price remains above the line, the trend is considered solid.
The second we see a break below the positive slope it may be an indication of a potential trend change that we must be aware of.
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Or, we can look at a stock like Chevron (CVX) that was caught in a downtrend to identify potential selling opportunities. A downtrend has a negative slope and is formed by connecting two or more high points. The second point must be lower that the first for the line to be considered a negative slope. As long as the line remains intact, as it had been in 2015, we can identity our resistance points.
However, once the negative slope saw a break to the upside, as it did in September 2015, the downtrend was broken and we saw a change in trend.
In short, it’s the highs in downtrend and the lows of an uptrend that will allow you to determine actual trends. Please remember that it takes two or more points to establish a trend line. The more points used, the more validity we can attach and rely on for support and resistance along the way.
Here are some tips to be aware of with such trend lines:
- The more times a stock touches a trend line, the more valid it becomes
- It takes two or more points to establish an actual trend
- In downtrends, connect your line along the price highs
- In an uptrend, connect your line along the price lows
- Be aware that trend lines can break down and signal a potential price pivot