Chapter 7

Trend Lines

When a stock is in a trend, it follows along a path upward (or downward). We can draw a line along the bottom of that movement as a guide for knowing when the trend has ended. This is one of the most helpful tools for investors and traders for following a trend. Below the trend line is drawn in blue, and it actually continued beyond the line. The trend would be over when the stock price was flat for a long time (which is referred to as channeling) or reversed sharply. There can be small pauses and reversals that can be ignored. The trend line is meant to make it easy to spot the slowing, or reversing of a price movement.

 

Breakout Lines

A breakout is quite obvious because it uses the previous highs and lows as the information to create these lines. In the image above, the previous highest price was used for the top. The top was the "price to beat." When the old high was exceeded, it can be used to indicate that higher prices are possible. As you see above, the price hovered near the previous high for many candles (where the green line ends). This is common for an old high to be "tested" before it breaks above. And many times, a previous high may not be beat. Investors sell off their position for a profit and the market sees more sellers than buyers...then the price falls. Here there was some turmoil at the top, but the price stayed there. Looking back at 2008 on that chart, the stock price dropped down again. However, it didn't exceed the price at that time.

When a stock is in a trend up and breaking out of the previous high it can be very rewarding investment. Especially if the company is providing an increasingly popular service or product. This chart was for Apple from 2007 to 2010. There are many more current charts available. Apple was used here because we all know Apple products.