Many traders and investors spend hours on end testing out lots of different technical indicators. However while many of them have their merits, there is a much easier way to generate winning trades and that’s to make full use of trend lines.
Trend lines are basically lines on a price chart that show you the current trend. These lines can be applied to your charts very easily. You simply connect the high points to form the upper trend line and connect the low points to form a lower trend line.
Once you have these trend lines in place you can then use them to time your entry and exit points. The first way you can put these lines to use is to use them to help determine areas of support and resistance. You will generally find that the price will reverse downwards when it approaches an upper trend line and reverse upwards when it approaches a lower trend line. This isn’t always the case of course, but it does tend to happen more often than not, particularly on the more popular shares.
Another way to use them is to wait until one of these long established trend lines is broken. For example if there is a clear upward trend and a solid lower trend line that has been sloping upwards for quite a while now, you may want to go short on the stock in question if the price closes firmly below this lower line at any point.
Finally if a stock has been trading sideways for several weeks or months, you should find that it’s possible to draw broadly horizontal lines connecting the high points and the low points during this period of consolidation. Then as soon as the price breaks above either of these lines, you can trade the prevailing trend which nearly always takes place after one of these breakouts. This is particularly true if the breakout is supported by above-average volume.
Whichever of these trading methods you decide to use, the point I want to make is that trend lines can provide you with better trading signals than any of the technical indicators that so many traders swear by. This is especially true on many of the most widely traded shares because so many other traders and investors are watching and trading the exact same trend lines. I personally like to trade those stocks where the long-term trend is finally broken after several months of a predictable trend, but all of these methods work extremely well.
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