Ask Colin

How can I draw a valid trend line?

The rules for valid trend lines are very clear, as taught in FIN 231 Technical Analysis  at Kaplan (previously E114 Technical Analysis at FINSIA/SIA. The problem with the example you sent is that you have a tentative trend line, but not a valid trend line. The reason is that there was a strong acceleration in the price that is shown by the price running way above the tentative trend line. The result has been that the line has never been validated.

Trend lines are mistakenly thought by many to define trends. This is wrong. What a trend line does is describe the speed of price change. Trend is defined by price. Trend lines are therefore a derivative of price and not price itself.

A far better indicator or derivative of price to use for trend definition is a moving average. If you take your chart and put Weinstein's favourite of a 30 week moving average on it you will see what I mean. My preference is for the simple moving average (SMA), by the way. I tend to use an even longer SMA, specifically a 260 day (or 52 week) SMA.

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