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Buying signals using trend lines

Please take trend lines as one of the most important tools to work out the direction of a particular stock. Remember that we do not want you to be trading against the trend. It is important to know how you are willing to stay with a trade. If you are going to be in the market for a period of 3 months then it is best that you identify a medium term trend. If you are going to be in the market for a couple of days that you must identify a short term trend.

There a few you need to know about the significance of trend lines:

i ) The longer the trend the stronger the significance of trend. When the price penetrates this long established trend the significance is higher than when the price breaks a short term trend.

ii ) As previously explained a trend line represent areas of support on the way up, or resistance on the way down. The more times a trend line has been touched by price the greater the significance of the trend.

iii ) Some trends also tend to be steeper than others. The angle of the trend also determines the speed which the stock rises. The steeper the angle of ascent or descent, it lowers the chances of the prices running on that direction for a long period of time. It is normally short lived.

Let's give you real life example so that your eyes get used to identifying trends. You will be amazed at the number of buying signals you can discover just by using trend lines.

We will use bar charts (OHLC) in our examples. We have used a green colour for buying signals and red colour circles for sell signals.

Just by viewing the chart below you can actually see how many buying signals you would have if you only use a trend line system. You are probably thinking well that looks so easy why doesn't every one do it? From our experience we can only tell you that it is easier said than done. This is where psychology plays a big role. You will soon find out that because we are all humans our minds changes state every time we read information. This is why it is important that you get into the habit of following your trading plan.

 

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We would like to mention that the trends lines drawn above are all short term trend lines. Day traders love to draw trend lines so get used to drawing trend lines. If you have forgotten how to do it go to trend lines in the beginners section of this web site.

Point (A) in the chart above illustrates our first buy signal, had you entered this trade your sell signal would have been point (B). Your stop loss if you had entered at point (A) should have also been triggered if the price fell back below the downtrend line. The line the joins (B) and (C).

You will note that the short term trend that extends towards point (B) is too steep therefore price was not able to be sustained. These entries however are good for day traders you are here to trade for a couple of days and to minimise your trading exposure inside the market. Sometimes you don't want to be inside trade over the weekend.

The trend line that joins point (C) and (D) however has a totally different angle of ascent to the trend line that joins point (A) and (B). The significance of this is that your trade has the potential to last a little longer. Your next entry point should have been taken at point (C) with your exit as soon as the price broke the uptrend at point (D). Remember that trendlines reverse its support/resistance role. Your stop loss should have been triggered if the price fell below the trend line that joins (B) and (C).

Entry point (E) is interesting. As you can see above an upward trend line was already evident, however there was short term resistance. We need to wait for the price to break resistance before we can enter a trade. Had you entered at point (E) your exit should have been triggered at point (F). Unfortunately you would had given away a bit of your profits as there was a price gap and the stock closed just below our upward trend line. This should have triggered double bells since it was bearish day. You don't have to wait for the news to come out and then make a decision, remember that you trading plan should be well set before you enter any trade, that way you don't have to make decisions on the spot when the market has presented you with an unforseen situation.

We do hope that by now you get the idea. In summary, it is important to know how to draw the trend lines and write down your stop, entry and target price before you get into a trade. We hope that by using real life example you can actually learn from what other technical analyst are doing and most of all we hope that you are becoming more confident with the terminology and trading experience.

You can always ask the author if you wish anything explained further. Go to contacts in the main menu.

 

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