How to draw trend lines part 1

If someone were to ask me what should you know about technical analysis?  I would say if there was one thing and or one thing only, it would be know how to draw trend lines.

Trend lines are dynamic supports and resistances that change everyday.  A trend is set in motion by a big buyer or seller.  Thus, trend traders must know which direction the big buyer or seller is going.    Depending on the performance of the market against the trend line, the big buyer or seller will likely stop.

If you want to know how to draw trend lines CORRECTLY, because 90% of market technicians get it wrong, read the following.

Rules for Trend Lines

Rule 1:  trend lines start from either the top of a consolidation or the retest of the consolidation.

Rule 2:  trend lines start from the point of a break in a trend line that hasn't been retested.

Lets start with the basic method to draw a trend line from a consolidation:

How to draw a Trend line from consolidation

1.  Pick an area that is ALREADY in a rally.  We are not so concerned with the base of the consolidation, but just the top.  (for a bear market, we are concerned with the base, and not the top of the consolidation)

2.  Pick out a consolidation in the rally.  Then draw the start of a trend line from the top of the consolidation where the breakout occurred.  Connect each trend line to a significant support.  (there is no hard fast rule, just use your judgement to ascertain what is a good support)

3.  If the market drops below your breakout point, then the trend for that point is over.  It is now a new consolidation box.

4.  Keep your trendlines that are broken because they can act as support or resistance later.

Here is an example:

There are two consolidation boxes with the top consolidation box having no retest,  the bottom one has one retest.  Both have trend lines starting from the top of the consolidation box.  The only difference between the two is the bottom one starts the trend at a later time.  

The blue lines are the point where the trend is over and at that point area above the breakout becomes a huge consolidation area.