How To Draw Trend Lines

Trend Trading

Trend Lines

How to draw trend lines - Drawing trend lines (T/Ls) is the simplest form of technical analysis but is the fundamental cornerstone of all stock market technical analysis. The odds are that a trend will continue so a trader increases his odds of a winning trade by trading in the direction of the current trend.

By learning how to draw trendlines correctly, we can stay in a trade for longer and hopefully catch a larger move in stock prices. When price does then break back  through the trendline it can be taken as an early warning of a possible reversal in prices, enabling us to get out of a trade with a larger slice of the profits intact.

How to draw trend-lines

Learning how to draw trendlines is pretty straight forward. A trend-line is a line drawn between at least two points on a stock chart where price has previously found support or resistance. The more touches a T/L has the better, as this shows confirmation of its value.

When drawing a trend line, choose two significant high or low points on the chart and draw the line extending it as far as required. If a trend trader bought this chart somewhere above the second Blue arrow he would have been able to stay in the trade with no worries, and would be nearly 100 x S&P500 points better off, simply by drawing the Blue trend-line and waiting for price to break the trend before exiting his position. Trend trading is ideal for swing trading and longer term investments.

In this case there is a trend forming resistance across the highs, so the market is either going to need something to push it up through resistance to continue the trend, or there may be a break down in prices coming. 
how to draw trend-lines
An Example of How to Draw Trend Lines

How to draw trend lines as the trend develops.

We redraw trendlines as the trend develops. In the chart shown above, you can see the acceleration in stock prices following the second significant low point. A trend line could be drawn under the next significant low where we have marked (a) the , thus creating a trend within a trend. The trend then slows again and  we have to redraw the trend-line again (b)

How to Draw Trend Lines - Channel Trend-Lines

How to draw trend lines - channel trend lines -Trending stock prices are very likely to fluctuate withing a price channel. A channel is produced by drawing trend lines parallel to an existing trend-line creating a price channel.

Once we had drawn the parallel to our Blue trend-line from the previous chart, we would have created this price channel and by using this method we would have been expecting resistance when price hits the upper trend line again (where the first Red arrow is).  Prices did find resistance at this point but never broke back down through the lower channel trend line keeping the larger up trend intact.

how to draw channel trend lines 
An Example of How to Draw Trend Lines

Redraw Trend-Line Channels

When prices then make a second significant high we should then redraw our channel trend lines to reflect the possible slowing or change of trend. In this example we can see the trend is weakening as the lower Blue T/L has been breached but overall up trend remains intact as prices are still being supported within the redrawn channel.

How to Channel an Impulse Wave on a Price Chart 

By Susan C. Walker

How do you choose one lesson from a basic tutorial that is chock-full of excellent information about Elliott wave analysis? You could browse through all 50 sections distributed over 10 lessons. Or you could do what some people do when they open a dictionary: let the book fall open and point your finger at a word. Sometimes you learn more from a random search than a deliberate one.

That's exactly how I chose this excerpt from EWI's Basic Tutorial to show how clear the writing and illustrations are. The one best place to start learning about wave analysis is this online tutorial, which is available to all Club EWI members -- a membership that is free and that brings you many resources about the kind of technical analysis and forecasting that we do here at Elliott Wave International.

The topic that my electronic finger pointed to online when I opened the online Basic Tutorial was Lesson 6.2: Channeling Technique. These four graphs and the accompanying explanation give a tantalizing taste of what you can learn when you take The EWI Basic Tutorial.

* * * * *

Excerpted from The EWI Basic Tutorial

Chapter 6.2: Channeling Technique

R.N. Elliott noted that parallel trend channels typically mark the upper and lower boundaries of impulse waves, often with dramatic precision. The analyst should draw them in advance to assist in determining wave targets and provide clues to the future development of trends.

The initial channeling technique for an impulse requires at least three reference points. When wave three ends, connect the points labeled "1" and "3," then draw a parallel line touching the point labeled "2," as shown in Figure 2-8. This construction provides an estimated boundary for wave four. (In most cases, third waves travel far enough that the starting point is excluded from the final channel's touch points.)

Figure 2-8
Figure 2-8

If the fourth wave ends at a point not touching the parallel, you must reconstruct the channel in order to estimate the boundary for wave five. First connect the ends of waves two and four. If waves one and three are normal, the upper parallel most accurately forecasts the end of wave five when drawn touching the peak of wave three, as in Figure 2-9. If wave three is abnormally strong, almost vertical, then a parallel drawn from its top may be too high. Experience has shown that a parallel to the baseline that touches the top of wave one is then more useful, as in the illustration of the rise in the price of gold bullion from August 1976 to March 1977 (see Figure 6-12). In some cases, it may be useful to draw both potential upper boundary lines to alert you to be especially attentive to the wave count and volume characteristics at those levels and then take appropriate action as the wave count warrants.

draw trend lines
Figure 2-9

 draw trend lines
Figure 6-12


Within parallel channels and the converging lines of diagonal triangles, if a fifth wave approaches its upper trendline on declining volume, it is an indication that the end of the wave will meet or fall short of it. If volume is heavy as the fifth wave approaches its upper trendline, it indicates a possible penetration of the upper line, which Elliott called "throw-over." Near the point of throw-over, a fourth wave of small degree may trend sideways immediately below the parallel, allowing the fifth then to break it in a final gust of volume.

Throw-overs are occasionally telegraphed by a preceding "throw-under," either by wave 4 or by wave two of 5, as suggested by the drawing shown as Figure 2-10, from Elliott's book, The Wave Principle. They are confirmed by an immediate reversal back below the line. Throw-overs also occur, with the same characteristics, in declining markets. Elliott correctly warned that throw-overs at large degrees cause difficulty in identifying the waves of smaller degree during the throw-over, as smaller degree channels are sometimes penetrated on the upside by the final fifth wave. Examples of throw-overs shown earlier in this course can be found in Figures 1-17 and 1-19.

trend lines 
Figure 2-10

Read the rest of this 10-lesson Basic Elliott Wave Tutorial online now, free! Here's what you'll learn:
  • What the basic Elliott wave progression looks like
  • Difference between impulsive and corrective waves
  • How to estimate the length of waves
  • How Fibonacci numbers fit into wave analysis
  • Practical application tips for the method
  • More

Keep reading this free tutorial today.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. 

 Stock Market Fundamentals - Contents

Return to the Traders Day Trading Homepage
Stock Market Trading with Technical Analysis Charts - Learn How to Trade Successfully!