Wednesday, April 18, 2012

Pay Attention to the Trendllines

What is a trendline?

Trendline is a straight line drawn on a chart through or across the significant limits of any price range to define the trend of market movement.

Trendlines are one of the first technical aspects of the market to be discovered. Technical analysis is based on the fact that the stock prices move in fairly definite trends. Technical analysts use trendlines in two ways: first, to identify the direction of the movement of the stock prices; second, to determine if and when the movement will change.

Uptrends and Downtrends

An “up trendline” is whereby a line is drawn on the chart by connecting the low points of the security as its price continues to rise. Each low point is successively higher than the previous low. This progression gives the trendline its upward slope.

A “down trendline” is drawn with a line on the chart connecting the high points of the security as it continues to fall. Each high point is successively lower than the previous hig
h. This progression gives the trendline its downward slope.

How to use trendlines?

Prices move in trends. Once a trend has been clearly identified, it's likely to continue for a time. Technical analysts look at trendlines for their ability to support price declines or resist price advances.

In addition, the slope of the trendline tells us the strength of the security price. In general, a healthy trendline should be around 45 degrees sloped. The steeper the slope, the more aggressive is the underlying security, however, it may not be sustainable. On the other hand, the flatter the slope, the weaker is the trend and there may be a possible correction in near term.

An Excercise:

Below is our KLCI chart, you may practice your chart reading skill by studying the chart carefully, let's see if you can make a forcast based on the information given. There's no right or wrong answer, it all depends on your forecasting skills. Enjoy!

(Click to enlarge)

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