The trend line is basic market psychology at work
You've not doubt heard the stock market saying, the trend is your friend. But how do you know what the trend is? When the market is undoubtedly bullish, it's easy to see the uptrend, but sometimes it can be difficult to see. That's when you need to look at trend lines. Read on to find out why the trend line is basic market psychology at work…
Trend identification is the cornerstone of a successful technical trading system, Gareth Stokes in Fear, Greed and the Stock Market
It’s quite simple to draw a trend line. All you have to do is connect the lows (as many as possible) of a particular share price range with a straight line.
Once you’ve identified the prevalent trend, you’ll know whether to focus on buying shares, or rather to wait for a better opportunity sometime in the future.
Another way to look at trend lines is simply this: If a share price is consistently recording higher highs and higher lows, this confirms an upward trend. The reverse situation (lower highs and lower lows) indicates a declining trend.
If you know the market trend, then you only have timing to worry about
Identifying the direction of the trend means you only have to worry about timing your entry and exit to the trade. So if you identify a rising trend, you only need to worry about when to sell – and if you identify a falling trend, you only need to worry about when to buy back in!
You can also use trend lines to indicate when a trend is broken. This occurs when the share price line breaks the trend line. When a trend line is broken it reverses direction – so an uptrend becomes a downtrend and vice versa.
So there you have it, why the trend line is basic market psychology at work.