A trend line is a straight line drawn across two or more swing points on a chart to show the direction and slope of a trend. A rising trend line connects higher lows and marks support under an uptrend; a falling trend line connects lower highs and marks resistance over a downtrend. Trend lines are the simplest of the line studies, the tools drawn on top of a price chart, a family that also includes channels, Fibonacci levels and horizontal support and resistance.
The idea goes back to Charles Dow’s observation that prices move in trends. A trend line puts that observation on the chart and turns a vague feeling (“it looks weak”) into a clear rule (“hold until the rising line breaks”).
How to draw one
- Uptrend: connect two clear swing lows, the second higher than the first, and extend the line to the right.
- Downtrend: connect two clear swing highs, the second lower than the first.
- Confirmation: two points define a line, but a third touch that holds is what makes it a valid trend line.
- Highs and lows or closes. Most traders use the bar extremes; some use closing prices, which ignore intraday spikes. Both are valid if you use them consistently.
- Channels. A parallel line through the opposite swings turns a trend line into a channel, which shows where a rally or a pullback may stall.
How traders use them
- Pullback entries. In an uptrend, a dip to a rising trend line that holds is a common place to buy, with a stop just below the line.
- Trend breaks. A close through the line is the first sign the trend is ending. A break of a rising line on rising volume is more serious than one on light volume.
- Role reversal. Like horizontal levels, a broken trend line often acts from the other side: a broken rising line may stop the next rally.
- Slope. Steep lines break quickly and are hard to sustain. Lines near 45 degrees on a normally scaled chart tend to last longer; a line that keeps getting steeper often marks a blow-off move.
- Staying on the right side. The main benefit of trend lines is discipline: it is hard to stay long for long while prices fall, because the line breaks.
Settings and common mistakes
- Forcing the line. Cutting through bars to make a line fit, or redrawing it after every break, defeats the purpose.
- Using minor swings. Lines through tiny wiggles break all the time. Use swings that are obvious without zooming in, on the timeframe you trade.
- Scale. Over long periods a log-scale chart gives a different and usually more reliable line than an arithmetic chart.
- Acting on an intraday poke. Wait for a close beyond the line, or a small buffer, before calling it broken.
Live chart: SPY (S&P 500 ETF), daily, with automatic trend lines. The chart updates every trading day.
Screen for it on MarketInOut
MarketInOut recognizes trend lines automatically, built from highs and lows (linhl_ events), from closing prices (linc_) or from opens and closes (linoc_). The events cover price being above or below a line, crossing it, touching it and bouncing off it. Stocks above their 200-day average that just bounced up from a rising trend line:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and linhl_burt
Stocks that just broke above a falling trend line on at least one and a half times their average volume:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and linhl_caft and rvol(21) > 1.5
Thomas DeMark’s TD-Lines, an objective way to draw trend lines from recent pivots, are available as events too.
Related: Moving averages, Fibonacci retracements, ADX and Directional Movement (DMI).
