Another interesting use of the trendline in swing, options and day trading is the fan principle. Let's first look at an up trendline. Sometimes after the up trendline is violated prices fall some before rallying back up to the old trendline. In the picture below, notice prices rallied to but didn't penetrate line 1. A second trendline is drawn, but it is also broken. Another failed rally attempt results in line 3 being drawn. The breaking of the third trendline is usually the indication of a trend reversal into a downtrend.



The picture below shows the breaking of a third down trendline, which indicates a trend reversal into an uptrend.



What is important here is the point that the breaking of the third trendline is the valid trend reversal signal. In both examples above, the previously broken support lines became resistance and resistance lines became support.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.