by Debbie Hodgkins
Updated: December 26, 2017
The following trading lesson has been adapted from Jeffrey Kennedy's eBook, "Trading the Line -- 5 Ways You Can Use Trendlines to Improve Your Trading Decisions."
"How to draw a trendline" is one of the first things traders and investors learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.
Yet you'd be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, editor of Elliott Wave International's Trader's Classroom service, puts it:
"A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic or extremely pessimistic."
In other words, a trendline can help you identify the market's trend. And, "the trend is your friend," remember? Consider this example in the price chart of Google.
That one trendline -- drawn between the lows in 2004 and the lows in 2005 -- provided price support for several corrective retracements over the next two years. Each time prices would touch that line, they would rebound higher and higher.
That's pretty basic. But there are many more ways to draw trendlines. For example, when a market is in a correction you can draw a trendline -- and then draw a parallel line to create a channel. You'll find that it often "contains" the corrective price action. When price breaks out of this channel, there's a good chance the correction is over and the main trend has resumed. Here's an example of a trend channel in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent rally.
Bottom line is, if you've been considering adding technical analysis to your arsenal, know that it doesn't have to be complicated. As Jeffrey Kennedy likes to tell his students, "A kid with a ruler can make a million bucks in the stock market if he/she knows how to draw a trendline."