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How to Interpret Trendlines when Day Trading

A technical analyst usually starts off by looking at a chart and drawing lines that show the overall direction of the price bars for the period in question. Rather than plot the graph on paper or print out the screen, she probably uses software to draw the lines.

Basic analysis of trends in price bar changes draws lines showing the general movement.
Basic analysis of trends in price bar changes draws lines showing the general movement.

With the basic trendlines in place, the trader can start thinking about how the trends have played out so far and what may happen next.

The most basic trendline is a line that shows the general direction of the trend. And that’s a good start, but it doesn’t tell you all you need to know.

The next step is to take out your ruler, or set your software, to find the trendlines that connect the highs and the lows. Doing so creates a channel that tells you the support level (the trendline for the lows) and the resistance level (the trendline for the highs).

Unless something happens to change the trend, securities tend to move within the channel, so extending the line into the future can give you a sense of where the security is likely to trade.

Drawing trendlines to identify channels.
Drawing trendlines to identify channels.

When a security hits its support level, it’s seen as relatively cheap, so that’s a good time to buy. When a security hits its resistance level, it’s seen as relatively expensive, so that’s a good time to sell. Some day traders find that simply moving between buying at the support and selling at the resistance can be a profitable strategy, at least until something happens that changes those two levels.

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