How to Draw Trend
Lines on Stock Charts
It is important to learn how to draw trend lines on stock charts
since they form the basis of many
popular trading strategies
There are many methods of drawing these lines. Entire books have
been written on the subject. This suggests that trend line drawing
is something of an art form. But while this is true to a certain
extent, the best methods remain more objective than subjective.
One of the better methods is discussed below. This method allows
you to consistently draw trend lines without needing to use a
In other words, it is fairly simple to draw on any stock chart
once you understand what is involved.
This method is widely attributed to Victor 'Trader Vic' Sperandeo.
Sperandeo achieved fame in the investing world when he accurately
forecasted the stock market crash of 1987 during his September 21
interview with Barron's, a weekly financial publication. He backed
up his forecast on October 16 - one trading session prior to Black
Monday - when he shorted the Dow and subsequently made 300% during
that ominous day when the DJIA fell by 22.6%, which is the largest
daily percentage loss in the index's history.
Sperandeo describes his method in Chapter 7 of his 1991 book Methods of a Wall Street Master
There he defines a trend as the prevailing direction of a stock's
price within a given period of time. Prices are considered to be
trending upward when they rise consistently over time, with only
temporary bouts of declining prices which do not make lower lows
than the previous price declines. Likewise, in a downward trend
prices decline over time, with only temporary price rallies which
never rise higher than previous price rallies.
Consider the following stock chart:
GLW stock chart without
Intuitively, you can see that Corning (GLW) has been in a downward
trend from February to September 2015. Using more precise
language, you would say that GLW is downward trending over this
period of time because it makes a series of lower lows, while
being interrupted by lower highs during the occasional rally.
But how exactly would you draw a trend line to capture this
The method for drawing downward
Draw a straight line from the highest high
point to the lowest minor high point just prior to the lowest low
point, making sure the line does not intersect any prices between
the two points. The line should then be extended down past the
lowest high point, and may intersect
prices as it does.
For GLW, the proper trend line would look like this:
stock chart with correctly drawn trend line
This trend line is the only line that can be drawn that best
satisfies the above criteria. Note that it cannot strictly be
drawn from the highest high in this case, because the
resulting trend line would intersect prices:
GLW stock chart with
incorrectly drawn trend line
Moreover, trying to draw the trend line from a lower minor
high point closer to the lowest low point would also be
improper. Again, the resulting line would intersect prices:
GLW stock chart with
another incorrectly drawn trend line
Also note how the properly drawn trend line touches prices in
3 places in the GLW stock chart. This is not unusual. While
only 2 points are needed to draw a straight line, in actual
practice you often see prices touching or 'retesting' the
trend line 3, 4, even 5 times or more. This is a welcomed
phenomenon in technical analysis. It confirms that the line
has been drawn correctly. It also indicates that a stock is
trending strongly. All else equal, the more times a trend line
has been tested, the more confident you can be that the stock
is trending in a particular direction.
To draw an upward trend line, you simply reverse the
The method for drawing upward
Draw a straight line from the lowest low
point to the highest minor low point just prior to the highest
high point, making sure the line does not intersect any prices
between the two points. The line should then be extended up
past the highest low point, and may intersect
prices as it does.
Here is an example:
GS stock chart with correctly drawn trend line
Goldman Sachs (GS) is clearly in an upward trend.
Between February and the end of June 2015, it made a
series of higher highs interrupted by higher lows on the
occasional sell-off. The trend line is properly drawn
from the lowest low up to the highest minor low
preceding the highest high. Extending past the highest
low, late-June prices are poised to retest the trend
line for the 5 or 6th time, or else to break it
altogether and begin a new trend downward.
A final caution. Do not think that once a trend line has
been drawn, it is set in stone. Since prices can change
drastically from day to day, they may very well upset
your neatly drawn trend line. There are actually plenty
that will cause you to re-consider
the viability of your trend line. So be prepared to
Now that you know how
to draw trend lines, put it to good use!
Begin building a
complete swing trading system here.