Trend lines (technical analysis)
Trend lines are a simple and widely used technical analysis construction drawn on the price charts of traded securities. Historically, trend lines used to be drawn by hand on paper charts, but these days it is much more common for trend lines to be drawn on computer-based, often real-time, charts using a mouse or even automatically.
A trend line is a bounding line for the price action (or less commonly other charts) of a security. The principal trendline is an upsloping line drawn through lower extremes of price for a security that is in an up trend, or its mirror image, a downsloping line drawn through the upper extremes of the price action for a security that is in a down trend. This differs from the trend lines defined using least squares regression or similar methods, where the data points are distributed on both sides of the line.
The other, less widely used type of trendline is an upsloping line drawn through high extremes in an uptrend, or a down sloping line drawn through lower extremes in a downtrend.
Trend lines are used in many ways by traders. One way is that when price returns to an existing principal trendline it may be an opportunity to open new positions in the direction of the trend, in the belief that the trendline will hold and the trend will continue further. A second way is that when price action breaks through the principal trendline of an existing trend, it is evidence that the trend may be going to fail, and a trader may consider trading in the opposite direction to the existing trend, or exiting positions in the direction of the trend.
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