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Trading strategies 101: How to use trend lines to spot a change in your trade's direction

by , 26 May 2015

Trend lines are one of the most useful aspects of technical analysis. Even if you opt for fundamental analysis, plotting trend lines can be so useful.

Trend lines are simple and easy to use. You can use them to find trades, manage trades and finally exit trades.

So how can you use trend lines to indicate a current trend is running out of steam?

Read on to find out…

How to use trend lines to show changes in trend

Have a look at the chart below…

Chart showing trend

This chart shows there were warnings that a change in trend was afoot.

For 12 months, this share headed strongly higher. The share price then peaked.

You can see on the circled area on the chart how the share price fell and broke through the bottom trend line. Buyers of the share tried to keep it going higher, but it wasn’t sustainable.

With the share price struggling to get back to the upper trend line, this was a sign the current trend was coming to an end.

You can see the ‘double top’ formation on the chart, Frank Hemsley in Profit Watch explains. This is also a bearish sign. But when this happens when you’re in a trade, it’s only a clue as to what may lie ahead.

To confirm a double top, the share price has to go through the support line (the lowest point between the two peaks).

It’s a waiting game at this point to see what unfolds, but there are signs of a trend change.

Look out for these signs of an imminent change in trend

Signs of a trend change brewing…

  • The price falls from the top of its trend channel.
  • The price breaks the upwards trend line.
  • The price fails to climb back up to the top of the trend channel.
  • The price doesn’t make a new high.
  • Signs of a double top formation starting.
  • The price breaks through the support line again.

If you’re in a long trade that starts to behave like this, start to consider taking your profits or at least tightening your stop loss to conserve your profits.

It may be time to think about shorting.

So there you have it. How to use trend lines to spot a change in your trade’s direction.

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Trading strategies 101: How to use trend lines to spot a change in your trade's direction
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