Last week, I had discussed how traders can utilize even the simplest form of technical analysis to their advantage. I used examples as AAPL and CAGC to draw uptrend and downtrend lines and when to take positions in these stocks. Today, I will share two advanced technical indicators of trends to
help traders make valid trend lines.
help traders make valid trend lines.
Spacing
It is important to form any trend lines that forms suitable spacing between data points. An ideal trend line should not be too far apart or too close together. An ideal trend line is made up of evenly spaced lows or highs depending on the time frame of the chart you are looking at. Most long term trend lines touch between weeks or months, while short term trend lines touch within days of each other.
If the lows or highs are too close together, then the validity may be in question. If the lows or highs are too far apart, then the relationship between the two points may be in question. Both of these situations may not really indicate any real trend at all.
Angles & Steepness
When drawing trend lines, we must take angles and steepness into consideration. The rule of thumb is as the steepness or angle of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance or decline over a short period of time. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level for very long even if it contains three valid data points. The ideal trend line angle or steepness is around 30-45 degrees.
By introducing proper spacing along with an ideal angle and steepness when creating trend lines, we can increase the validity of trend lines to our technical analysis. However, it is difficult to identify and create trend lines that meets many technical indicators of trend lines. Therefore, we must use our preference to get the most out of what presented to us.
As you will read in later posts, there are more indicators we can bring into our analysis to generate higher confidence. Volumes, Moving Averages, MACD, etc. are several other examples of technical indicators that will be discussed later.
Other Posts:
Using Downtrend Line to Trade Stock like CAGC
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