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Candlesticks with Trendlines

 

 

As a technical trader, trendlines are very important to watch. So what are trendlines?

Trendlines are basically support or resistance lines. For a stock that is trending higher, it could have a supporting trendline. For a stock that is trending lower, it could have a downward resistance trendline. These trendlines though imaginary, are very effective indeed. Each time the stock approaches its trendline, the probabilities are extremely high that the support/resistance will again come into picture. The more times the stock bounces off this line, the more effective it will be the next time. Ofcourse, there will come one point of time in the trend, when the supply-demand equation will reverse and the trendline will be broken.

Psychology plays a dominant role in making these trendlines effective. As more traders and investors participate in the use of technical analysis, the trendlines will be that much powerful. Let us say you were just introduced to this concept of trendlines. The next time you pull up a chart and see an obvious imaginary trendline sloping upward, what will you logically think of doing? Let us answer this question by looking at the following chart.

If you notice this chart before Point C, would you not be compelled to think that the stock will likely bounce off the uptrend line? Most traders will bet on this probability.

As a Candlestick trader, you will have an edge over the regular technical traders. You will know what signals need to form as the stock approaches the trendline. As the stock falls from its highs and comes near the uptrendline, you need to see indecisive signals. You need to see bullish reversal patterns. Seeing these signals will give you the confidence that the supporting trendline will hold this time too. If you see dark tall candles breaking the trendline, you immediately know that the bears have complete control this time around, and the probability of the support holding is less. Candlesticks will prevent you from getting in such losing trades.

Chart courtesy stockcharts.com