When your trading strategy involves a technical analysis you will need to chart the data, which means that you must become comfortable with using charts to determine trends and indicators. You must able to spot ongoing trends and recurring patterns that disrupt the continuity of data. Charted data may be divided into two categories, which includes reversal patterns and continuation patterns. Reversal patterns indicate a market entry point or time to liquidate an open position. Continuation patterns indicate that a trend was disrupted and then continued in the direction of the original trend.
Market trends present a pattern of the market’s broad movement. Trend lines are determined by connecting two points on a linear graph of historical market data as either peaks or troughs in the data. Even though a trend may be established with only two points, more points provides a better picture of true market trend. Trends may be established for any chosen timeframe, from minutes to years. Trend lines may indicate an upward or downward pattern or they may not point in either direction. Data sometimes settles into familiar charting patterns
A common analytical technique is to analyze the intersection of trend lines with the most recent price. If a downward trend intersects with the most recent price, it indicates that you should buy. If an upward trend line intersects with the most recent prices, it indicates that you should sell.
Trend lines are controversial because many traders become confused as to where to actually draw the lines. Since trends are defined by price actions, trend lines are intended to be a tool for determining the direction of a trend. Upward trends represent higher lows and indicate that prices are going up while downward trends represent lower highs and indicate that prices are going down. With an upward trend, you should draw a straight line that connects the lowest low to the highest high and in a downward trend; you should connect the highest low to the lowest high. Prices are then expected to fall within these boundaries. Many traders are confused as to whether they should draw the lines at closing price highs and lows or the highs and lows of a particular period. They are confused as to whether the lines should be adjusted to account for spikes in the data, whether spikes in the data should be ignored or whether trend lines should be adjusted to the scale of the chart.
Advocates of trend lines use more sophisticated trend line channels. These channels connect the lows of price actions on one side and the highs of price actions on the other side and a purchase is made at or near the support trend line and a sale at the line of resistance. The objective is to buy cheap and sell at profit several times over the length of a price action. This can very profitable so long as price remains within the chosen channel. Should the price break out of the channel, traders need to make consideration for several factors and establish parameters for their measurements.