Located on a security price chart, the trendline, or trend line, predicts the general direction in which the security — whether it be an index, commodity or stock — is headed. The upward or downward direction of the trendline is determined by connecting the lowest or highest price points which the security has reached within a given time period.
Trendlines can apply to non-securities-related data that is depicted in a graph. For example, a trendline could be applied to a graph which shows the birthrate in a country over time. Still, trendlines are most commonly discussed in association with securities.
A straight trendline, or one which has “leveled-off” reflects neither an upward or downward direction and has little importance to technical analysts. Straight or leveled-off trendlines sometimes follow a period of initial activity when a security first hits the market.
When a trendline reflects a decline or rise of at least 20% within a one year period, it is considered a primary or major trend. Upward primary trends are referred to as “bull markets”, and downward primary trends are referred to as “bear markets.” When a trendline veers opposite from its primary trend direction for three or more weeks, i.e., a spike during a bear market or a sharp decline during a bull market, this indicates an intermediate or secondary trend. When a trendline fluctuates within a short period of time, from about six days to three weeks, it reflects a minor trend.
“Playing” a trend typically involves analyzing the trendline and choosing to invest before or after the trendline has broken. Playing intermediate movements which follow the basic major trend’s direction is generally considered a much safer method for a technical analyst — safer than playing minor trendline movements.
There are various signals that indicate when a trendline has been broken. Typically, the presence of a pattern or a significant shift in the price of a security indicates the break of an intermediate or major trend. However, trendline breaks which occur on trading day are usually ignored by investors in lieu of the day’s closing price.
Although trendlines are a popular tool for technical analysis, they aren’t the only tools investors rely on to make their investment decisions. Often, trendlines are analyzed alongside other security indicators such as continuation and reversal patterns.