Point and Figure Trend Lines
Trend lines can be defined as a "line that shows the trend", or “lines that show the support or resistance”.
A complex definition:
“A straight line which connects two or more price points and then extends into the future to behave as a line of support or resistance is called trend line”.
Trend lines determine the direction of trend in technical analysis. In Point & figure the trendlines do not have to connect two or more price points, instead they are always drawn in 45 degree angle which makes trendlines in Point & Figure more systematic and the chartist needs to depend less on his or her own judgement, which can often be wrong.
Trend: Direction of price of the product/services/goods is called trend. Trend represents the direction of the market.
The basis of all the data analysis is to identify and determine that when and where the trend would go. Generally Trends can be divided into three categories as major, intermediate and near-term.
A trend which remains in motion for a year or more is termed as major trend, while a trend which remains in motion for three weeks or more is intermediate trend and near trend is for less than three weeks.
In point and figure chart these lines are used to measure the trend direction. The trend lines used in P&F are different from the trend lines used in other charting techniques; this difference can be seen from the appearance of these lines. In case of P& F Charting technique the trend lines are drawn at an angle of 45 degree or -45 degree depending on the direction of the trend.
The trend lines in P&F charts are traditionally drawn using the character "+". This follows the same principle of keeping everything as simple as possible, without the need for complexity. The trend lines can also be drawn with a dashed line.
Types of trend lines in P & F Charts:
- Bullish trend lines
- Bearish trend lines
1. Bullish trend lines These lines are drawn at an angle of 45 in the upward direction. These lines start from the lowest “0” in the upward direction. These lines indicate increasing prices of the products/goods. Positive signs are used in Bullish trend lines. As the prices fall these lines breaks. Bullish Support Line can be drawn on a P & F chart by finding the lowest point made after the completion of a downward market trends (bear market). The break in these lines is a sign of falling prices .This results in the down trend or the stocks may enter a sideways trend.
Picture of a Bullish Trend line:
2. Bearish trend lines These lines are drawn at an angle of -45 in the downward direction. These lines start from the highest X in the downward direction. These lines indicates decreasing price of the products/goods. Positive signs are also used in Bearish trend lines. Bearish Resistance Line can be drawn on a P & F chart by finding the highest point made after the completion of a upward market trends (bull market). The break in these lines is a sign of rising prices. These results in the uptrend or the stocks may enter a sideways trend.
Picture of a Bullish Trend line:
Advantages of trend lines in P & F Chart:
- Trends lines are useful for finding out trend reversals and false breakouts.
- A person is confident that he is on the right side of the market when he sees the trend line is not broken.
- Trend lines can be used for placing stop loss orders at levels where the stock price should not go, if the trend stays intact.
- Trend lines can be drawn automatically by Bull's-Eye Broker Point and figure software
Picture of Point and Figure software Bull's-Eye Broker showing automatic trendlines: