A trendline is one of the basic components of most technical analysis patterns. To construct a trendline, simply connect either the high prices or low prices on an asset’s chart. The resulting line is the trendline.
There are two types of trendlines. An uptrend line is formed by connecting the low prices for an asset, where the more recent low price is higher than the previous low price. An uptrend line extends into the future and can be thought of as a level of support for the asset’s price. A downtrend line is exactly the opposite, and is formed by connecting the high prices for the asset, where the more recent high is lower than the previous high. A downtrend line can be thought of as a level of resistance for the asset’s price. Only two points are necessary to draw a trend line, but the more points are used in constructing the line, the more traders tend to consider it as a valid indicator of an asset’s overall trend.
Trendlines have a variety of uses in technical analysis, most fundamentally for their ability to predict levels of price support and resistance. Trendlines are also used as components in a variety of specialized technical analysis charts, including trend channels and wedge patterns.« Back to Main Page