Data analysis forms the bed rock of a majority of decisions that are taken. Right from politics, to business, data is the foundation that everything depends on. This is more visible in the world of Finance, where data is the reason for Billion Dollar trades on a daily basis. For example: How are the rates of petrol/ diesel determined? How do some investors always make money by just following the price of stocks on their laptops/ PCs. By identifying a certain trend investors will be able to indicate the speed and direction of price, and also understand patterns during the period of price fluctuation . This blog tells you in detail about trendlines and how it is used.
What are Trendlines?
A trendline is a type of line which over the axis highs or under axis lows to determine the prevailing direction of price. A trendline can also be called as a visual representation of support and resistance in any time frame. They indicate the speed and direction of price, and also explains patterns during the period of price fluctuation.
Why are Trendlines used?
Technical analysts consider Trendlines as an important tool for stock analysis. They are basically used in 2 branches of stock research: Fundamental Analysis and Technical Analysis. Fundamental analysis is used to show what to buy in the market, and on the other hand, technical analysis is used to determine the exact time to buy it.
Big companies are driven by profit. A company which has a growth in its earnings and revenues is also inclined to have an increase in its stock price, which is what fundamental analysts depend on for analysis. This is because the markets try to match and assign a value to the earnings. This value is shown by the market price, which is what the major technical analysts and stock charters use it to analyze it in the market.
These analysts, instead of looking at the past performance, look for trends in the prices. To identify trends there is a tool which we talk about “Trendline”. Trendlines help technical analysts determine the current performance of prices in the markets. Technicals analysts say that identifying the correct trend is the first step of making a good trade.
How to create a trendline?
The most important part in creating a trendline is that you should at least have 2 points on a price chart. Every analyst has a different way of showing his trends. Some analysts use minute frames such as one minute or five minutes. Others determine by using daily or weekly charts. Some analysts doesn’t use time but view trends based on tick intervals rather than time intervals. The main reason why Trendlines are globally popular is that they can be used to identify trends regardless of the time period, time frame or interval used.
For Example: If company X is trading at Rs.35 and it moves to Rs.40 in a span of two days and Rs.5 in three days, so the analyst has to plot three points on the chart, which will start at Rs.35, then move to Rs.40, and then at last at Rs.45. If an analyst draws a line between all the three price points, they are said to have an upward trend. Thus, the trendline drawn has a positive slope and is indicating the analyst to buy in the direction of the trend. And on the other hand, if company X’s price falls from Rs.35 to Rs.25, then the trendline indicates a negative slope and the analyst should not sell in the direction of the trend.
Trendlines may help analysts identify and determine the value of stock, but it is still a skill that takes many years to learn. Trendlines have been an important part of any trader/ investor’s skill set and they will continue to be important in the future. BSE Institute Limited, a 100% subsidiary of the World’s largest stock exchange BSE India, helps you learn all about Trendlines on its online learning portal bsevarsity.com. A short-term course on Trading with Trend Lines can help one learn and identify patterns in stocks and thus be better investors and money managers. As they say – well begun is half done!