Trend lines help identify the market trend, whether downward or upward. The trend line is vital for investment and one of the technical analysts’ most potent tools. Traders draw those recognizable lines on charts so that they can show valuable data in the best form. It may be a series of investment values or anything else. The resulting trend line provides a concrete idea about where and how to invest and many other things. An upward or downward trend line hints at the upcoming movements of an investment’s value.
What is a Trend line?
An investor can take the help of different types of trend lines to decide when he should buy an item and when to sell it. Before discussing the types, it is essential to know what is a trend line.
A trend line is a vertical or horizontal line helping interpretation of data. Diagonal lines join different price points with a single straight line. The lines also interpret the speed of the price changes and describe price contraction-related patterns.
What Trend lines describe
Trend lines indicate probable areas of resistance and support. Looking at the business performance history or other details may not work, but price action trends can guide investors in the right direction. It helps to determine the direction rightly and can do so at any time. A trend line is like a reliable friend for a technical analyst, and making good trade requires figuring these lines out correctly.
Creating a trend line needs a minimum of two price points. Some analysts use time frames to draw the lines, and others use weekly or daily price trend charts. Identifying trends in any period makes a trend line universal in appeal and usage.
If a company trades at a particular rate, then moves to an increased rate in the next two days, and the rate further increases in another three days, the analyst gets three price points to draw a line on the chart. The line will start from the first rate the company was trading at; then it will connect to the rate reached after two days and end to the rate reached after the next three days. Analysts call it the upward trend. The falling of prices is also tracked similarly to get the downward trend.
Types of Trend lines
There are different types of trend lines. The most common types are logarithmic, power, polynomial, exponential, and linear trend lines.
Linear Trend Lines
Linear trend lines are straight lines that are the best fit when a data set is linearly decreasing or increasing. The rise and fall of the data go parallel with the linear lines.
Polynomial Trend Line
A polynomial trend line is a curved one used when a dataset changes its data values. This line is orderly categorized, and when the data fluctuates, the order can be determined accordingly.
Logarithmic Trend Line
A curved line used for the dataset that may increase, decrease and level out anytime is called a logarithmic trend line. It is helpful in every situation, positive or negative, and the exponential trend line is inversed in the logarithmic trend line.
Power Trend Line
It is just another curved line, but its specialty lies in identifying trends of a dataset that is increasing at a fixed rate. But the problem with this kind of trend line is that it does not work with harmful data or data of zero value. It is pretty symmetrical and similar to curved exponential lines.
Exponential Trend Line
An exponential change in a dataset, be it a fall, or rise, is figured out by the exponential trend line. Just like a power trend line, it also can’t be used with negative data or data of zero value.
Conclusion
Financial analysts generally use trend lines. Any investor willing to get an insight into stock, currency, commodity, or any other investment can use the trend line. But a trend line has limitations too, and it has to be changed from time to time with new data, and it can’t last long.
