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based on price activity and trading volume. Charts and indicators are used to uncover patterns that
may point to future price movements.
30 Computerized Investing
you cannot draw Figure 2. Down Trendline
a trendline. There-
fore, it is not always
possible to create a
trendline.
Spacing
The spacing of the
lows used to form
an up trendline and
the highs used to
form a down trend-
line should not be
too far apart, or too
close together. The
proper distance
between points will
largely depend on the
timeframe used with
the chart, as with
Figure 3. Internal Trendline
all price movement.
Ideally, trendlines are
made up of relatively
evenly spaced lows
or highs.
Steepness
The steeper the
trendline, the less
valid the support
or resistance level
it represents. Steep
trendlines are caused
by sharp advances or
declines over a short
time period. Prices
that are moving
upward or down-
ward rapidly cannot
be sustained in a trend; eventually points sparingly, as the more points other lows over this period.
prices will move below or above the you ignore to fit the trendline, the
trendline. less meaning the line carries. Conclusion
The long-term trendline for Potash Trendlines are a simple way to
Internal Trendlines Corp. (POT) in Figure 3 extends illustrate the trend of the market
There may be times when you are upward from August of 2007 and or an individual security. However,
drawing a trendline that the highs passes through the lows in January like any technical analysis tool, they
and lows will not match up exactly, 2008 and March 2008. These lows can generate false signals if they
perhaps because the angle of the were formed with selling climaxes are not used properly. Furthermore,
trendline is too steep or the points and represent extreme price move- trendlines should not be your sole
are too close together. In these cases, ments that protrude beneath the decision-making tool. Using other
you may be able to draw internal trend line. By drawing the trendline technical indicators can help you
trendlines that ignore one or two through these lows, the upward confirm whether a change in trend is
points. However, you should ignore trendline matches better with the taking place.