Back to Basics - Trend and trendlines

The first thing to do when looking at any chart is to identify the trend. What we need mean by trend? We simply mean what direction is a market moving in? Luckily there’s only three ways a market can move - it can move up; it can move down or it can move sideways.

How do we identify the trend? The definition of an up move is for higher reaction highs and higher reaction lows. The definition of down move is for lower reaction highs and lower reaction lows. The definition of a sideways trend is when the highs and lows are about the same level.

Once we’ve identified the trend. It’s helpful to place on a trend line, now In a down move really you want to be connecting the highs and for a valid trendline you need to connect at least three highs.

Why do we like to do this? because trendlines help to enforce discipline and not only that but they offer potential entry points. They also help you with timing and they can give you a good place to put your stops.

It is worth noting that the longer a trendline the more important it becomes. So a 3-month trend line is more important than a 3-week trend line.