What it measures
An uptrend is usually described as a series of higher lows and higher highs, and a downtrend as lower highs and lower lows. A trend line makes that description visible: join two of the lows of a rise and the line shows how steeply the lows have been climbing.
The slope is the one number in it: how much the line rises or falls with each bar. Once two points are chosen the rest is arithmetic, and the line can be carried on to the right, past the last bar, into space where there are no prices yet.
That last step is where the trouble starts. The line is exact, and it looks like a forecast. It is not one: it is the path the lows would follow if they kept doing what they did between two points chosen by the person holding the ruler.
How it is calculated, step by step
- 01
Find the swing points.
A swing low is a bar whose low is lower than the lows of the S bars on each side of it; a swing high is the mirror image.
- 02
Choose two of them.
For a line under a rise, two swing lows; for a line over a fall, two swing highs. Call them (x₁, y₁) and (x₂, y₂), where x is the bar number and y the price. The chart on this page takes the last two inside its look-back.
- 03
Work out the slope.
Slope = (y₂ − y₁) ÷ (x₂ − x₁): the change in price for each bar.
- 04
Extend it.
Line at bar x = y₁ + slope × (x − x₁).
- 05
Compare the price with it.
Distance = close − line. A close on the far side of the line is called a break.
The scale of the chart matters. On an ordinary (arithmetic) scale a straight line means the same number of points per bar. On a logarithmic scale it means the same percentage per bar. The same two points give different lines on each, and over a long chart they part company.
A worked example, by hand
Two swing lows: bar 10 at 100.00 and bar 30 at 104.00.
- Slope = (104.00 − 100.00) ÷ (30 − 10) = 4 ÷ 20 = 0.20 a bar
- Line at bar 40 = 100.00 + 0.20 × (40 − 10) = 106.00
- If bar 40 closes at 107.50, the distance is 107.50 − 106.00 = 1.50 above the line
- If bar 41 closes at 105.90, the line there is 106.20, and the close is 0.30 below it: a break
The break says that the lows are no longer rising by 0.20 a bar. It does not say they are falling. The price could now rise more slowly, go sideways or turn.
The numbers in this example were chosen to be easy to add up. They are not prices of anything.
How people read it
- As a picture of pace. A steep line under the lows means a fast rise; a shallow one, a slow rise.
- By its touches. Two points make a line; a third turn at the line is taken as some evidence that others see it too.
- A break. A close beyond the line means the pace it described has not been kept. Readers then look at what the price does next, not at the break alone.
- Channels. A second line, parallel to the first and drawn through the opposite turns, encloses the price in a channel.
What it cannot tell you
- It cannot exist without a choice. Any two points on a chart can be joined, and a different pair gives a different line. Move the settings on this page’s chart and the line moves while the prices stay the same.
- It cannot say that a break is a reversal. Steep lines are broken constantly by trends that then continue at a gentler pace.
- It cannot say where the price will be. The part of the line to the right of the last bar is an extension, not information.
- It cannot be confirmed quickly. A swing point needs bars after it before it counts, so the line through the newest turn is always drawn late.
Common mistakes
- Choosing the two points that make the line fit, and then being impressed by the fit.
- Mixing wicks and closes: drawing through the low of one bar and the close of another. Either convention is used; the same one should be used throughout.
- Redrawing the line after each break so that the trend is never over.
- Trusting very steep lines. The steeper the line, the sooner an ordinary pause crosses it.
Questions people ask
- How do you draw a trend line?
- Find two turning points of the same kind: two lows in a rise, or two highs in a fall. Join them with a straight line and extend it to the right. The slope is the difference in price divided by the number of bars between the two points. A third turn near the line is taken as some support for it.
- How many touches make a trend line valid?
- By convention, two points are needed to draw a line and a third touch is treated as a test of it. ‘Valid’ is a strong word for a line someone chose: more touches mean the line has described more of the past, and still say nothing certain about the next bar.
- Should a trend line go through the wicks or the closes?
- Both are used. Lines through the wicks use each bar’s extreme; lines through the closes ignore brief spikes. What matters is using one convention consistently, because a line drawn through whichever point happens to fit can be made to show anything.
The words on this page
An indicator is arithmetic on prices that have already happened. It describes what a price did; it does not predict what a price will do. The chart on this page is invented: a seeded random walk, not a market. This page is an explanation for study. It is not advice, a recommendation or a forecast, and nothing an indicator shows says anything certain about what a price will do next.