A trendline is a charting tool used to illustrate the prevailing direction of price or data points. It is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price, and it is a visual representation of support and resistance in any time frame. A trendline can give traders a good idea of the direction in which an investments value might move. However, a trendline does not always dictate the trend, and a trendline break does not necessarily signal a trend reversal. The validity of a trendline increases along with the number of touches.
The type of data you have determines the type of trendline you should use. There are six different types of trendlines: linear, logarithmic, polynomial, power, exponential, and moving average. A linear trendline is a best-fit straight line that is used with simple linear data sets, while a logarithmic trendline is a best-fit curved line that is most useful when the rate of change in the data increases or decreases quickly and then levels out. A polynomial trendline is a curved line that is used when data fluctuates, and the order of the polynomial can be determined by the number of fluctuations in the data or by how many bends (hills and valleys) .
When using trendlines, it is important to consider how minor design decisions influence interpretation. Trendlines can be easily misinterpreted by an unfamiliar audience, so it is important to clarify through design choices whether the trendline is a matter-of-fact or an estimation.
