Drawing Ascending Buy (Trend) Lines!
Trend lines are so called because they show the motion of the trend. If you have an ascending line then the price is going to be rising.
When it comes to drawing trend lines we know we need to be connecting the low of down moves. It is important to note that even the best traders sometimes have to draw a few lines until they are happy that they have drawn the correct one because on some charts there may be lots of lows to connect.
⇑ ⇑ ⇑ ⇑ Ascending Buy Lines
Remember – to draw an ascending (rising) buy line you need two lows – one higher than the other. Draw a line starting at low one and connect it to low two – then continue that line outwards.
Before you go on to draw a trend line on the opposite chart, check out this little top tip!
The rounded number rule
The markets tend to respect rounded numbers, Think 20p 30p 40p 50p (per share). Often advances in price will end at a rounded number and drops on share prices will stop at rounded numbers. The same applies here with buying just a tad above rounded numbers (as other traders will no doubt be trying to buy at the rounded numbers too!).
Consider this with stop losses as well, if traders will be buying at a rounded number then put your stop a margin below it for added protection.
An ascending buy line can be placed on the chart overleaf – we have placed some arrows to help you locate the low points you need!
When is a broken trend like ‘broken’?
In an uptrend we buy on buy lines, but when does a buy line / trend line get broken?
There are a few answers to this question however the best method is the two day rule.
As a general rule, a close beyond a trend line is more significant than just a intra-day penetration. SOMETIMES even a closing penetration is not enough.
Two day rule
To have a valid breaking of a trend line, prices must close beyond the trend line for two successive days. One sometimes is not enough because you will find the next day may rally back above the line.
If you would like more help on this then check out Technical Analysis videos!
Very often the breaking of a trend line is one of the best early warning signs of a change in trend.
Also – let’s not forget that the longer a trend line has been in place the more significant it’s penetration becomes, which is why the Gold market broke down so quickly after that 10 year trend line got taken out!
For the following chart – your task is to draw an ascending buy line. You should be able to identify a fairly obvious buy line for this chart.
On the following chart you will see a buy line that has been violated – what numbered candle confirms that the buy line had been broken?
Ascending Buy Lines – A Trading Strategy
We are learning how to draw ascending buy lines – but how do you use them to know when to buy and sell shares?
Buying in an uptrend is exactly what a good trader does – you will be amazed how many people buy in down trends just because they think the price is low!
A good trader doesn’t just want to buy a share that has been going up, they want to buy a share that has been going up and has had a short term pull back. We call this “Buying the dips”.
n an uptrend you should always only buy if the price hits a buy line. If you buy a lot higher than a buy line and the price drops to that buy line – breaks under it and starts a new down trend then your loss is going to be HUGE! (We’re talking Hulk Hogan’s Biceps HUGE!!)
So we buy on the buy line- if it holds then we enjoy seeing our shares go up in value. If it breaks below then we know the trend is over and we need to sell our shares with only a small loss.
Sticking to this strategy over time will ensure your losses will be small and your profits will be like Hulk Hogan’s biceps!
So please use this when buying shares, don’t be silly by buying shares in a down trend! For more on trading strategies visit our “Trading Discipline” youtube videos!
For the following chart – your task is to draw an ascending buy line. You should be able to identify a fairly obvious buy line for this chart.
