Meaning of Trend Lines

A trend line is a straight line for the price movement of a security. It is a momentum indicator. It measures the rate of increase in the share price over time and alerts traders to any acceleration or deceleration of the trend. It also provide a direction of the security’s movement.

Trend lines are a simple and widely used technical analysis approach to judging entry and exit investment timing. The difference between trend lines and other momentum indicators is that one can use visually identify the trend.

A trend line connects two or more price points and then extends into the future to act as a line of “support” or “resistance”. Trend lines are used in many ways by traders. If a stock price is moving between support and resistance trend lines, then a basic investment strategy commonly used by traders, is to buy a stock at support and sell at resistance, then short at resistance and cover the short at support. The logic behind this, is that when the price returns to an existing principal trend line it may be an opportunity to open new positions in the direction of the trend, in the belief that the trend line will hold and the trend will continue further.

Another utility comes into play when price action breaks through the principal trend line of an existing trend. It is evidence that the trend may be going to fail, and a trader may consider trading in the opposite direction to the existing trend, or exiting positions in the direction of the trend.

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