A trend line is a straight line drawn on a price chart that connects a series of turning points. In an uptrend you connect the lows, and the line slopes up underneath the price. In a downtrend you connect the highs, and the line slopes down above the price. It is the oldest tool in technical analysis and still one of the most useful, because it shows in one glance which way the price has been travelling and at what speed.
A trend line works like a sloping version of support and resistance. Instead of a flat floor at ₹1,400, the floor rises a little every day. Buyers who missed the last dip often wait for the price to come back to the line, which is one reason the line can act as support for a while.
How to draw a trend line properly
- Pick the timeframe first. A line on a daily chart describes a trend of weeks or months; on a 15-minute chart it describes a few hours. See choosing a chart timeframe.
- Find two clear swing lows (for an uptrend). A swing low is a bar with higher lows on both sides of it. The second low must be higher than the first.
- Draw the line through both and extend it to the right, into the future.
- Wait for a third touch. Any two points make a line. A third bounce from the line is what makes it a trend line other traders are likely to watch.
People argue about whether to draw through the wicks (the extreme highs and lows) or the candle bodies (opens and closes). Both are used. What matters is to be consistent and to accept that a trend line is a zone a few rupees wide, not a precise price.
A worked example
Say a stock makes a swing low at ₹1,380 on day 1, rallies, and makes a higher swing low at ₹1,410 on day 21. The line rises ₹30 in 20 trading days, or ₹1.50 a day. On day 41 the line sits at ₹1,440 (₹1,410 + 20 × ₹1.50). If the price dips to around ₹1,440 on day 41 and bounces, that is the third touch.
Now add the other side. If the stock's high between the two lows was ₹1,470 on day 11, draw a line through ₹1,470 parallel to the trend line. On day 41 it sits at ₹1,515 (₹1,470 + 30 × ₹1.50). The stock is now in a rising channel about ₹75 wide: roughly ₹1,440 to ₹1,515 on that day, both edges rising ₹1.50 a day.
| Point | Day | Price on the line |
|---|---|---|
| First low | 1 | ₹1,380 |
| Second low | 21 | ₹1,410 |
| Trend line projected | 41 | ₹1,440 |
| Upper channel line projected | 41 | ₹1,515 |
Channels: rising, falling and sideways
A channel is a trend line plus a parallel line on the other side of the price. There are three kinds:
- Rising channel: higher highs and higher lows. Buyers are in control. Traders who follow the trend look to buy near the lower line.
- Falling channel: lower highs and lower lows. Sellers are in control. Rallies to the upper line often fail.
- Sideways channel (range): flat lines. This is ordinary support and resistance.
Within a channel, the middle line (halfway between the two edges) often acts as a minor turning point too. When the price stops reaching the upper line of a rising channel and turns back from the middle, the trend is losing energy, even before the lower line breaks.
Checking the trend with indicators
A trend line is drawn by hand, so it is good practice to check it against indicators that are calculated the same way for everyone. Here are today's readings for Reliance Industries:
If you have drawn an uptrend line, you would expect the price to be above the 50-day average, the 50-day above the 200-day, and the Supertrend pointing up. When your line says "uptrend" but the averages say otherwise, your line may be too steep or drawn on too short a timeframe. The full chart on the technicals page lets you see the lows you would connect.
When a trend line breaks
All trend lines break eventually. The question is whether a break is real. These are the usual tests:
- Close, not touch. A candle that dips below the line during the day and closes above it has not broken it. Many traders wait for a close beyond the line, or two closes in a row.
- Volume. A break on heavy volume means many participants acted on it. A break on thin volume is easier to reverse.
- The retest. After an uptrend line breaks, the price often rallies back up to the underside of the line and fails there. Old support becomes resistance.
- Steepness. Very steep lines (a stock up 30% in two weeks) break often and quickly. Gentle lines that have held for months matter more when they go.
It also helps to count how long the line has lasted. A line that has guided the price for six months on a daily chart has shaped many traders' decisions, so its break changes many plans at once. A line drawn last week on a 15-minute chart has shaped very few. The longer and gentler the line, the more weight its break deserves.
A broken trend line does not automatically mean the trend has reversed. Often the price simply moves sideways and the trend continues at a slower angle. The breakouts guide covers how to tell real breaks from false ones.
Trend lines and moving averages
A moving average is a kind of automatic, curving trend line. The 50-day average often runs close to a hand-drawn uptrend line on a steady stock. The difference is that a trend line is straight and stays where you drew it, while a moving average bends as prices change. Many traders use both: the drawn line for exact levels, and the moving averages for an objective second opinion.
Common mistakes
- Forcing the line. Cutting through several candles to make a line "fit" means it is not a real trend line.
- Drawing with only two points and trading it as proven. Two points are a guess; three are a pattern.
- Ignoring the scale. On a long chart where the price has doubled, a log scale shows trend lines more fairly than a plain scale. Lines can look broken on one and intact on the other.
- Never redrawing. Trends speed up and slow down. Adjust the line when new swing points form rather than defending an old one.
- Treating a line as a promise. Results, news and market-wide falls ignore trend lines. Always use a stop loss.