In the Dugout: Trading off a Trendline
Even the most novice of investors are able to view a chart and notice that stocks do
not move in a straight line, either up or down. Nonetheless, by placing a trendline on
a chart, traders can get a good idea of the direction the stock is heading. Of course,
just because a stock has been in a general trend for a period of time, it doesn't mean
it is going to continue forever. By finding stocks or indices that have consistently
followed and bounced off a trendline, traders can put the odds more in their favor.
"Chart generated by RavenQuote charting software. Copyright (C) 2000 Tenlights.com #"
Trendlines can be used to go long or short a security. Looking at the chart of SDLI above, notice how a trader could have made money by going long when the stock touched the trendline. One note of caution though, a trendline isn't considered such until there are at least three points connected. Therefore, in SDLI's case, an astute trader could have made money on the move from about $325 to $400. Then could have again made good money on the break of the trendline by going short or buying put options as it broke through. A lot of times traders will be disappointed if they missed the initial break, but notice how the stock came back to retest the trendline before again falling.
Trendlines are often considered support and resistance points. In our example, the SDLI trendline was support for the stock on the way up and resistance after the stock broke below the trendline. Using trendlines can help a trader pick entry and exit points with relative ease and are a great way for a beginning trader to get their feet wet in the market.
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