Have you ever wondered how traders decide to get in and out of stocks? Here I will explain the powerful concept of trendlines and how they can help even a long term investor get more from their portfolio.
There are different ways to draw trendlines.
Usually an uptrend is drawn by joining the valleys or the bottoms in the price line.
A downtrend is drawn by joining the peaks or the tops in the price line.
Once the share price has broken the trend, that could be a potential signal to buy or sell.
Consider the below chart of the S&P ASX 200 index over the last 10 years. You can see that an uptrend was in place from 2003-2007. At the end of 2007, we saw the long-term trend broken (identified by the circle on the graph). That would have been a signal to potentially look at selling out of the market. And right now the market hasn’t yet broken the downtrend that is currently in place.
In the above example of the S&P ASX 200, I’ve used a weekly graph. Long-term traders would probably examine a longer-term chart such as a weekly or monthly chart. Short-term traders would use a daily or intraday graph.
Here's another graph, this time showing AMP.
This is AMP's share price over the last 10 years.
You can see that there was a downtrend from 2001-2003. In 2003, that downtrend line was broken with the share price rising above the downtrend line. That would potentially be a signal to buy into the stock (identified with the ‘buy’ circle).
Next you can see an uptrend between 2004-2007. In 2008 you can see that the uptrend line was broken. This would have been the signal to get out of the stock.
At the moment, AMP's share price is continuing to move in a downward trend. If you want to buy into the stock, you would probably wait until the share price breaks the downtrend line which you can draw by connecting the peaks in the share price.
Technical analysis or charting is not an exact science but as you can see, it can help you with timing your investments to get more return. It's just another tool that can help both traders and investors alike.
Happy trading!
Julia Lee Equities Analyst Bell Direct
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