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Dry goods! How not to be confused by the market and accurately judge the trend o

Published: Jun 20, 2024
Updated: Jun 20, 2024

It is well known that the breakout of trend lines has significant analytical importance for the selection of buying and selling opportunities during the trading process. Therefore, determining when the trend line is broken, whether it is an effective breakthrough or an ineffective one, is crucial for investors.

This article will provide some methods and market principles for judging the breakthrough of trend lines, but remember to combine the specific market situation at the time before applying them.

1. The breakthrough of closing price is the real breakthrough

The breakthrough of the closing price through the trend line is an effective breakthrough and can also be considered a signal to enter the market. Taking the downward trend line, also known as the resistance line, as an example, if the market price has broken through the resistance line, but the closing price is still below the resistance line, it proves that the market has tried to go higher, but the buying demand is not sustained, and the selling pressure comes, causing the price to finally fall back at the closing. Such a breakthrough is not an effective breakthrough, that is to say, the resistance line is still valid, and the market trend has not changed.

Similarly, the breakthrough of the upward trend line should be judged by whether the closing price falls below the trend line. To give a counterexample, there are often such situations in the chart records: after the trend line is broken, the price returns to the original position. This situation is often a trap set by the market.

2. Principles for judging the breakthrough

To avoid the wrong timing of entering the market, some technical analysis experts have summarized several principles for judging true and false breakthroughs:

A. After discovering the breakthrough, observe one more dayIf the price continues to develop in the direction of the breakthrough for two consecutive days after the breakthrough, such a breakthrough is an effective one, and it is a safe time to enter the market. Of course, entering the market two days later, the price has already changed significantly: the price to buy is higher; the price to sell is lower. However, due to the clear direction and the overall trend being set, investors can still act, and in comparison, it is much better than entering the market rashly before.

B. Pay attention to the high and low prices two days after the breakthrough

If the closing price on a certain day breaks through the downward trend line (resistance line) and develops upwards, and if the transaction price the next day can cross the highest price, it indicates that there is a large amount of buying orders following after the breakthrough of the resistance line. On the contrary, when the price breaks through the upward trend line and moves downward, if the transaction the next day is conducted below the lowest price, it indicates that there is a lot of pressure to sell after the breakthrough, and it is worth following to sell.

C. Refer to trading volume

Usually, trading volume can measure the market atmosphere. For example, when the market price rises sharply, the trading volume also increases sharply, which indicates that the market has confidence in the direction of the stock price movement. On the contrary, although the market price soars, the trading volume does not increase but decreases, indicating that there are not many people following, and the market has doubts about the direction of the movement.

The breakthrough of the trend line is the same. When the price breaks through the resistance line, if the trading volume rises or remains at the usual level, it indicates that there are many people following after the breakthrough, and the market has confidence in the direction of the price movement. Investors can follow and make huge profits.

However, if the trading volume decreases after the breakthrough instead of increasing, it should be cautious to prevent the price from returning to the original position after the breakthrough.

D. Lateral movement

When studying the breakthrough of the trend line, it is necessary to explain a situation: the breaking of a trend is not necessarily the immediate start of a new trend in the opposite direction. Sometimes, due to rising or falling too quickly, the market needs to make a slight adjustment and make lateral movements.If the range of fluctuation is very narrow, it forms what is known as a "sideways market" or "dull market." The sideways movement can last for some time, sometimes for a few days, sometimes for a few weeks before it ends. Technical analysis experts refer to this period as the "digestion phase" or "consolidation phase."

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