Here's How Trendlines Can Help Traders Catch That Perfect Breakout

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  • 13 Apr 2023

A trendline indicates a broad trend, especially when considered on a bigger scale and aids helps in developing a trading strategy. A trendline is drawn considering the “lower lows” in terms of support and “higher highs” as resistance points to identify the next influential levels. This could take a horizontal form as well. The idea is to recognize whether the price is holding the trendline or not.

Nowadays, most day-traders use trendlines to get a sense of the trading sentiment. Basically, they consider the trendline as a support or resistance on the chart. Any breach of the same signals a major turnaround in the sentiment and thus affects the price movement.

When looked at a bigger scale, like monthly or yearly, trendlines are crucial in determining the breakout and breakdown views. A trendline breakout on the monthly chart asserts that the stock or index is ready to move higher, with an optimistic outlook. Similarly, a trendline breakdown reflects the onset of a bearish sentiment that eventually hampers the price's up move.

  • When a stock or index breaks the trendline, volumes need to surge. Follow-up buying confirms the trend.

  • The breaking candle needs to decisively close to carry forward the same momentum.

  • One can also take the assistance of technical indicators that exhibit overbought and oversold conditions.

  • The stop-loss can be considered as the highest high/ lowest low of the last two sessions.

This indicator provides relevant information about the trend; however, in a short time-frame, it also reflects wild swings. Due to this, trendlines are majorly used to gauge the medium-to-long term view. Herein, a trendline break helps one build or exit their positions.

On the short-term scale, the trendline indicator needs assistance from the volume parameter. It isvery unlikely that trendline alone can perfectly identify a shift in sentiment.

It is extremely difficult to identify the right high or low to draw a perfect trendline. Sometimes, the price action is furious and unpredictable, with wild swings, making identifying a perfect pricelevel quite complex.

Apart from these, trendlines play a significant role in chart formations. Patterns like the Rising channel pattern, Falling channel pattern, Ascending triangle, Symmetrical triangle, Descendingtriangle rely on trendlines for their formation.

  • When the entire sector or benchmark indices are in extreme bullish phase

  • When the price trades in the consolidation range for quite a while

  • The price starts scaling highs without any healthy corrective moves

  • The stocks witnesses a rise in volumes without the price showing any volatility

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