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How a Simple Line Can Improve Your Trading Success

Elliott Wave International’s Jeffrey Kennedy explains many ways to use this basic tool

by Debbie Hodgkins
Updated: December 24, 2014

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 people 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 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. Consider this example in the price chart of Google.


 

That one trendline -- drawn between the lows in 2004 and the lows in 2005 -- provided support for a number of retracements over the next two years.

That's pretty basic. But there are many more ways to draw trendlines. When a market is in a correction, you can draw a trendline and then draw a parallel line: in turn, these two parallel lines can create a channel that 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 in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent move.

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5 Ways You Can Use Trendlines to Improve Your Trading Decisions

Learn five ways to draw trendlines that will help you to identify support and resistance, the end of a move, and changes in trend -- critical information for your trading success.

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