Can anyone help me what is the logic behind trendlines in stock markets?

Question

I know there is a lot of people who follow trendlines when they do stock analysis. Is there any logic behind this?

Answer 1

Only one answer so far really addressed your question.

Logic behind trendlines is that the market is full of participants and the participants have a memory. They typically buy and sell at certain points based on pain. It's a whole psychology thing, but in essence, over time, trends tend to work because people have similar habits and then it becomes a self fullfilling prophecy.

It's wild, but you'll see trends and patterns across almost EVERY timeframe, both short and long.

Combine the trendlines with some other indicators and you'll have technical analysis.

Let me know if you have other questions!

Hope that helps!

Answer 2

The logic behind trendlines is as the name suggests - they are lines that show the current trend of the stock. A trendline is drawn by connecting the stock lows across a chart OR the stock highs across a chart - so as long as the stock is above the trendline line at the lows it is in an uptrend/below the trendline at the highs it is in a downtrend.

That being said - to be of any use for trading or analyzing your stocks - there must be relevance to the time period you are drawing a trendline for AND you must have some kind of setup that will use the trendline. For instance - drawing a trendline on a 1 minute day trading chart is not indicative of a trend - especially compared to drawing a trendline on a daily-weekly-monthly chart.

Two ways this trendline may be used for trading in the context of your analysis - sell the break of an up trend line as this could be an indication that the trend has reversed - where another trader would buy a pulback to the up trendline as they would view this line as support to the up trend.

Here is a link to a trading education resource that I joined that has a section that tells a lot about charting and technical analysis - may be of some help to you too:

http://www.thetradersresource.com/investorflixpreview.html

Answer 3

The overall idea behind trendlines is that there is a significant follow-the-crowd mentality in the stock market. If a stock seems to be attracting buyers, it will generate interest in the market and attract even more buyers, many of who are simply counting on the momentum of the stock's popularity to make its price go up further. Conversely, when a lot of people sell a stock, it can trigger widespread panic selling, as no one wants to be left holding the bag.

Of course, trends aren't everything in stock markets and aren't very useful in the long term, but if you're looking to trade in the short term, they're worth paying attention to.

Answer 4

Yes there is. There is a statistical calculation that hypothetically extends the past trend from whatever period you take, and see where the stock would go if that trend continues. The theory is that more often than not the trend will continue rather than break. However, remember many factors are at work.

Many market factors influence the price of a stock. There are "market makers" who must try to influence markets to their benefit while staying within the law. There are institutions that must answer monthly to their customers. And there are short and long options players as well as long holders. Also there is public opinion, the number of shares outstanding,etc.

Answer 5

You should check out www.OptionsXpress.com or log on to www.Learn-to-trade.com. Username (guest) Password (guest)

The trendline helps you to determine a stock performance in the past and what it is most likely to do in the future. To me it is like an assumption. You need two pivot points for a trendline. Each violation of a pivot point is an indication to exit the trade. It also helps the trader to determine whether or not to stay in a trade or exit. I am just learning the stuff myself. It is fun You should check out Learn-to-trade at 885 Don Mills Road #123 (416 510-5560)

Answer 6

Well what your looking at is the 50 day trend line verus 13 day trend line and when they cross each others path.

So for example lets say the 50 day trend line is at a gradual slope down for the past 5 months. Then you see the 13 day line slope up alot faster and actually cross the 50 day line.
This is usually a good sign to buy and vice versa if the 13 day line slopes down and crosses the 50 day one its time to sell.

These trend lines are great, but you also need to read the news about the companies, watch insider trading and other stuff.

I use http://clearstation.etrade.com/ to get free statistics and they have a great graphic and custimisable trend system. You can setup fake portfolios and play the stock market with fake money.

Hope this helps,

Adam Beazley
http://www.Plug-In-Home-Business.com

Answer 7

The factors to be taken in are varied:
1. Normal ratio/analysis
2. Demand and supply position getting altered due to raw material abundance or in crunch
3. Price and cost of manufacture addition due to power cuts, labour input days, methods newly introduced, governmental laws
4. Competitors strategy leading to altering decisions on marketing and price
5. import and export restrictions of the product
6. High rate of rejections after supply, failure in use
7. Global markets position and foreign exchange stability
8. New products into market as replacement and product reaching product life
9. Merger, acquisitions and joint efforts of companies
10. diversification proposals to mention a few.
VR

Answer 8

An explanation.

http://www.marketscreen.com/help/atoz/default.asp?hideHF=&Num=106