Trendline is located on a security price chart. The trend line, predicts the general direction in which the security is headed. This security could whether be an index, commodity or stock.
In order to determine the upward or downward direction of the trendline the lowest or highest price points are connected which the security has reached within a given time period.
Trendlines can also apply to non-securities-related data
Trendlines can also be applied to non-securities-related data that is shown in a graph. For instance, a trendline could be applied to a graph in which the birthrate in a country over time is shown. Still, most commonly trendlines are discussed in association with securities.
Straight Trendline
Neither an upward or downward direction is reflected by a straight trendline, or the one which has “leveled-off” and such trendlines has little importance to technical analysts. Sometimes a period of initial activity when a security first hits the market is followed by a straight or leveled-off trendlines.
Primary or Major Trend
When a decline or rise of at least 20% within a one year period is reflected by a trendline, then it is considered as a primary or major trend.
Kinds of Primary or Major Trend
There are two kinds of Primary or Major Trend:
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Bull markets : Upward primary trends are known as bull markets.
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Bear market: Downward primary trends are known as bear markets.
Intermediate or secondary trend
When a trendline changes its direction and move opposite from its primary trend direction for three or more weeks, i.e., if there is a spike during a bear market or if the market experience a sharp decline during a bull market, then this indicates an intermediate or secondary trend.
Minor Trend
When there are fluctuations in trendline within a short period of time, from about six days to three weeks, then the trendline reflects a minor trend.
What do you understand by Playing a trend?
For an investor “Playing” a trend means that he has to analyze the trendline and choose to invest before or after the trendline has broken.
It is considered to be much safer method for a technical analyst to play intermediate movements which follow the basic major trend’s direction a as compared to playing minor trendline movements.
Signals that indicate when a trendline is broken
There are numerous signals in the market by which it is indicated that when a trendline has been broken. Typically, the break of an intermediate or major trend is indicated by the presence of a pattern or a significant shift in the price of a security.
However, in lieu of the day’s closing price usually the investors ignore the trendline breaks which occur on trading day.
Trendlines – A tool for technical Analysis
Although it is true that for technical analysis trendlines serves as a popular tool, but this doesn’t means that they are the only tools investors rely on to make their investment decisions. Usually, trendlines are analyzed along with other security indicators such as continuation and reversal patterns.
