Trend lines are very similar to the support and resistance levels. In the same way a stock is likely to bounce on a support level, a stock will likely bounce on an upward trend line. A trend line is simply a straight line that connects two or more price points and extends into the future to serve as line of support or resistance.
There are two types of trend lines, those that go up and serve as support, and those that go down and serve as resistance. Below are examples of each:
While it only takes two points to draw a trend line, more than two points add validity. Conversely, a trend line’s validity decreases as the steepness increases. The angle of a trend line created by sharp moves is not likely to offer a meaningful support (or resistance) level for long.
Also keep in mind that trend lines don’t have to line up exactly. There are times when a stock gets ahead of itself and bounces a few ticks above the trend line. A stock can also become volatile and dip below the trend line momentarily.
Even though trend lines offer great insight, they should not be used alone. Other items – such as horizontal support and resistance levels – should also be used to find points of support and resistance.