Trading Boot Camp: Book Gains in Any Market Using Trendlines...
Your holiday trading boot camp begins today.
For the rest of the holiday season, I’ll be showing you how to use your charts to improve your trading and increase your profits.
First up are trendlines—a confusing and misunderstood concept for many newer traders. But if you follow these simple tips, you’ll quickly learn how to use them to pull double-digit gains out of any market. Yes, any market.
Trendlines are popping up all over the place as technical analysis and trend following techniques gain in popularity. Heck, I even see them on CNBC sometimes! But if you want to get anything from these little lines drawn on charts, you have to know what you’re looking at—and how to properly draw your own.
Here is an example of two trendlines– one up, one down:
When you first begin plotting these lines on a chart, you might think the information is almost too simple to be of value. But it’s important to remember that you’re doing a whole lot more than just drawing a line.
You’re looking for inflection points where buyers or sellers could possibly take charge.
The first thing you need to remember is that drawing your trendlines is not an exact science. When you’re performing fundamental analysis, for example, there’s no hard and fast rule that a price-earnings ratio of 16 is good or bad. It depends on a wide range of factors. That means weighing variables like the industry you’re looking at or the behavior of the overall market. The lines you draw on a chart are likely to be somewhat different from the lines drawn by another trader.
But the fact remains: traders are making tons of money following trendline strategies and drawing these simple lines on the charts. Trading using trendlines works because markets move based on human behavior. At the end of the day, the buying and selling pressures that they represent are the only factors that directly impact a stock’s price.
Remember, nothing in the market is static.
The trendlines you draw today — no matter how many points they connect — are not going to hold forever. Opinions, corporate fundamentals and economic factors all change. When they do, the trendlines that mark supply and demand eventually break.
Look at how a broken trendline offered an early warning to biotech investors back in August:
When these trendlines are breached, they send us an important message. When the uptrend broke its support line in the above chart, it was a signal that the supply-demand equation was shifting toward sellers. Demand was no longer found along that trendline where traders and investors were accustomed to seeing the stock bounce. Traders who took the cue locked in their gains and were spared from a massive sell-off.
Even within a larger trend, it’s a big deal when a support or resistance level gets broken.
Yes, that’s even true for stocks that are already in powerful uptrends! Just check out Amazon over the past six months:
Taking a look at Amazon’s chart, you can see that the $540 resistance level was taken out in October. That’s a major breakout because the $540 area is where a glut of sellers had shown up for the prior three months. Just look at the yellow bar.
When breakouts like this one happen, the probability of a big move increases because significant demand was required to push shares above that resistance level sellers were dominating. Now buyers are once again in control and the stock can soar.
If you were to buy this stock on the break of $540, you could have booked significant gains in a matter of weeks. That’s why scouring the market for breakouts in stocks already displaying major uptrends is a sure-fire way to consistently grow your trading account.