TRENDLINE

John Murpy explains the trendlines in his book like that:

"The simple trendline is possibly the most useful tool in the study of market trends. And you'll be happy to know that they're extremely easy to draw. Chart analysts use trendlines to determine the slope of a market trend and to help determine when that trend is changing. Although horizontal trendlines can be drawn on a chart, the most common usage refers to up trendlines and down trendlines. An up trendline is simply drawn under the rising reaction lows. A down trendline is drawn above the declining market peaks. Markets often rise or fall at a given slope. The trendline helps us to determine what that slope is."[1]

Up trend is defined as a series of higher highs and higher lows in sequence. Downtrend is defined as a series of lower highs and lower lows in sequence. A trend line touches to the low and high point as show on the image below[4].



HOW TO DRAW TRENDLINES?

John M.Pring explains tells that trendlines can be drawn by connecting two or more peaks or throughs, othwerwise it is not a valid trendline[2]. He mentions the importance of the closing prices. Because it sperates those who are willing to take home aposition overnight or over a weekend from those who are not.Therefore closing prices are more important chart points than highs or lows. Dr. Elder supports this view in his book. He mentions that with the following sentence.

"Most chartists draw a trendline through extreme high and low points, but it is better to draw it through the edges of congestion areas. Those edges show where the majority of traders have reversed direction. Technical analysis is poll-taking — and polltakers want to track opinions of masses, not of a few extremists. Drawing trendlines through the edges of congestion areas is somewhat subjective. You have to watch out for the temptation to slant your ruler."[3]

RATING TRENDLINES

Dr. Elder consider following criteria to evaluate the importance of a trendline[3]

1. Timeframe: the long the time frame the important the trendline
2. Length: the longer the time frame the more valid it is
3. Number of time it touches: The more contacts between prices and trendline the more valid that line.
4. Its angle: The angle between a trendline and the horizontal exis reflects the emotional intensity of the dominant market crowd.
5. Volume: If volume expands when prices move in the direction of a trendline, it confirms that trendline; if volume shrinks when prices pull back to a trendline, it also confirms the trendlines. If volume expands when prices return to a trendline, it warns of potential break; if volume shrinks when prices pull away from a trendline, it warns that the trendline is in danger.

Resources:
[1] The Visual Investor, John Murpy
[2] Technical Analysis Explained, John M.Pring, p.136
[3] Trading for a living, Dr. Elder, p.88-92
[4] Most Of What You Need To Know About Technical Analysis, (02/04/03)Matt Blackman, www.workingmoney.com