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Trendline and its application

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We often hear such famous Wallstreet quotes “Do not fight the trend” or “The trend is your friend”. The whole purpose of technical analysis is to identify the trend in early stage. Then what is a trend? In this topic, we will define what a trend is and its applications.

What is a trend


A trend is the direction of the market, which shows us the way it is moving. It is very important because if you do not know the direction, you do not have an edge to go long or short. It is just a gambling. In addition, markets do not move in straight line. Instead, markets move in zigzags. These zigzags resemble a series of successive waves with peaks and troughs. A trend is the direction of those peaks and troughs.

Types of Trends


There are three types of trends Uptrend, downtrend and sideways. An uptrend is defined as a series of successively higher highs and lows. Inversely, a downtrend is defined as a series of successively lower highs and lows. A horizontal highs and lows would define a sideway trend or trading range.

How to draw a trendline


An uptrend line is drawn along the identifiable lows. In opposite, A downtrend line is drawn along the identifiable highs. To draw a trendline, you need to locate two highs or lows and connect them.

Applications


- To draw a trendline, you need at least two highs or lows. But it takes three to confirm a trendline. Trendlines become stronger the more time they are tested.
- A trend tends to persist until it have a sign to reverse. Then if you indentify a right trend, do not exit your position too soon. Inversely, if you are on wrong side, alwasys remind yourself Do not fight the trend and let price hit your stoploss order. Never change or remove stoploss order.