Any two points on a chart can be joined by a straight line. That is the whole problem with trend lines. The tool is so easy to use that almost every chart can be made to show one, at almost any angle, and a line drawn after the fact will always appear to have been respected. Drawing one the chart actually supports takes a few rules decided before you see where the line lands.
To draw a trend line, connect at least two swing lows in an uptrend (or two swing highs in a downtrend) and extend the line to the right. Two points only draw the line; a third touch that holds is what tests it. Choose wicks or closes, and linear or log scale, before drawing.
The rest of this post covers how to draw trend lines in that checkable way: which points to anchor, why the scale matters on long charts, what the slope tells you, and what a break actually records.
How to draw trend lines, step by step
- Identify the trend first. A rising trend line belongs under a sequence of higher highs and higher lows, connecting the higher lows. A falling one sits above a sequence of lower highs, connecting those highs. If the swing structure is not there, there is no trend for a line to describe.
- Pick two swing points as anchors. In an uptrend, the first anchor is usually the low the trend started from, and the second is a later higher low. The points should be distinct swings with a clear move between them, not two lows a few sessions apart.
- Extend the line to the right. The line is only useful going forward. Its job is to say where price would be if the trend continued at the same rate.
- Wait for a third touch. StockCharts’ ChartSchool puts the general rule plainly: it takes two points to draw a trend line, and the third one confirms its validity. Until a third swing comes back to the line and holds, the line is a hypothesis.
An illustrative example, with prices made up for the purpose: a stock bottoms at 20, rallies to 26, pulls back to 23, rallies to 29, and pulls back to 26. A line from 20 through 23 rises about 3 points per swing; extended, it passes close to 26 at the time of the second pullback. That pullback holding at the line is the third touch. A pullback to 24 instead, below the line, would have meant the line drawn through the first two points did not describe the trend after all.
Should you draw to the wicks or the closes?
Either, consistently. Drawing through the wicks uses the true extremes of each session. Drawing through the closes ignores intraday probes and uses the price most participants mark positions at. The two methods produce different lines, with different slopes and different touch counts.
The rule that matters is to choose before drawing and apply the choice to every anchor. Mixing them, a wick for one anchor and a close for the other, lets you draw almost any line you were hoping for, which is exactly the problem the method exists to prevent. The same discipline applies to the converging lines of a symmetrical triangle.
Does the chart scale change the line?
On long charts, yes. A linear (arithmetic) scale spaces prices evenly, so a move from 10 to 20 takes up the same vertical distance as a move from 100 to 110. A logarithmic (semi-log) scale spaces prices by percentage, so 10 to 20 takes up the same distance as 100 to 200, because both are a doubling.
ChartSchool notes that semi-log scale is especially relevant for long-term trend lines or large price changes. Bulkowski goes further and recommends the log scale for trendlines, noting that a trend change shows up sooner on it than on the arithmetic scale.
The reason is geometric. A stock rising at a steady percentage rate draws a curve that bends upward on a linear chart. A straight line drawn under the early part of that curve falls further and further below price, so a break, when it comes, happens far from the most recent swing low. On a log chart the same steady percentage trend is a straight line. For a few weeks of data the difference is small; across years it can put the line in a completely different place.
What does the slope tell you?
A steeper line describes a faster trend, and ChartSchool’s guidance is that as the steepness of a trend line increases, the validity of the support or resistance level decreases. A line under a sharp, brief advance is unlikely to hold for long, simply because the rate of rise it describes is hard to sustain.
Bulkowski’s trendline study supports that. He logged 3,720 up-sloping trendlines on 699 stocks priced above $5, using data from March 1991 to April 2021, and reviewed the 3,172 that formed in bull markets. In his test of buying after the third touch and selling on the first close below the line, shallow trendlines did better than steep ones: those steeper than the median slope lost 0.7% on average and the shallower ones made 2%. Longer lines did better than shorter ones (2.9% against a 1.4% loss, splitting at a median length of 44 days), and lines with four touches did better than lines with three (a 2% gain against a 2.1% loss).
Read those as descriptions of which lines held up in his sample, not as a method. His own summary of the trading test overall was that it did not work well: the average trade made 0.7%, the median lost 0.9%, and the win/loss ratio was 37%.
What does a trend line break mean?
Less than it looks like. A close through a rising trend line records that price has fallen below the rate of rise the line described. That is a real change. It is not, on its own, a reversal of the trend.
A trend line is a straight-line summary of a swing structure, and the swing structure is the more fundamental thing. An uptrend can break its line and simply continue rising at a slower angle, or move sideways for weeks, without ever making a lower low. The higher highs and higher lows post covers why the swing sequence, not the line, is the definition of a trend.
Bulkowski’s numbers on what follows a break are modest. After a downward breakout from an up-sloping trendline, his glossary-defined break-even failure rate (a decline of less than 5%) was 30%, and 52% of breaks saw price drop no more than 10%.
Breaks also fail in the ordinary way: price closes through the line, then recovers back above it. The false breakout post covers why the definition you use for a break (wick or close, how far, for how long) determines how many of them turn out to be false.
So the honest reading of a trend line has two parts:
- The line holds while: price closes on the trend side of it, and each pullback that reaches it finds buyers (in an uptrend) or sellers (in a downtrend).
- The line’s read is invalidated by: a close through the line. The trend’s read is invalidated separately and later, by the swing structure: in an uptrend, a close below the most recent higher low.
How do trend lines relate to support and resistance?
A trend line is a diagonal level. Where a horizontal level marks a price that has repeatedly stopped a move, a trend line marks a rate that has repeatedly stopped pullbacks. The same test applies to both: a level or line is real when price has respected it more than once, and imagined when it was drawn to fit two points. The support and resistance post covers the horizontal version and why levels can switch roles once broken.
Where trend lines mislead
Lines redrawn after every break. If the line is moved each time price closes through it, it is no longer describing the trend; it is describing your hopes for it.
Lines drawn on the visible window. How much history the chart shows changes which swing lows look significant. Choose the anchors from the swing structure, not from whatever fits the screen.
Two touches treated as three. A line through two points has been drawn, not tested.
Steep lines treated as durable. A line under a sharp, short advance describes an unusually fast rate, and its break says the rate slowed, which was always likely.
What this post is not
It is not a way to forecast where price will go. A trend line is a description of a rate, drawn by rules you chose in advance and tested by price coming back to it. Draw it that way, state the close that would break it, and keep the swing structure in view as the thing the line summarises. For the rest of the chart’s mechanics, start with how to read a stock chart.
Sources
Every figure above was checked against these before publishing.
- StockCharts ChartSchool, Trend Lines
- Bulkowski, Up-Sloping Trendlines
- Bulkowski, Glossary
- Wikipedia, Trend line (technical analysis)