20/01/2011 – How a Simple Line Can Improve Your Trading Success

“How to draw a trendline” is one of the first things
people learn when they study technical analysis. Typically,
they quickly move on to more advanced topics and too often
discard this simplest of all technical tools.

Yet you’d be amazed at the value a simple line can offer
when you analyze a market. As Jeffrey Kennedy, Elliott Wave
International’s Chief Commodity Analyst, puts it:

“A trendline represents the psychology of the market,
specifically, the psychology between the bulls and the bears.
If the trendline slopes upward, the bulls are in control.
If the trendline slopes downward, the bears are in control.
Moreover, the actual angle or slope of a trendline can determine
whether or not the market is extremely optimistic or extremely
pessimistic.”

In other words, a trendline can help you identify the market’s
trend. Consider this example in the price chart of Google.

 
That one trendline — drawn between the lows in 2004 and the
lows in 2005 — provided support for a number of retracements
over the next two years.

That’s pretty basic. But there are many more ways to
draw trendlines. When a market is in a correction, you can
draw a trendline and then draw a parallel line: in turn, these
two parallel lines can create a channel that often “contains” the
corrective price action. When price breaks out of this channel,
there’s a good chance the correction is over and the
main trend has resumed. Here’s an example in a chart
of Soybeans. Notice how the upper trendline provided support
for the subsequent move.

For more free trading lessons on trendlines, download Jeffrey
Kennedy’s free 14-page eBook, Trading the Line – 5
Ways You Can Use Trendlines to Improve Your Trading Decisions.
It explains the power of simple trendlines, how to draw them,
and how to determine when the trend has actually changed. Download
your free eBook.