Trendlines and channels

Drawing a trendline

In an uptrend, a trendline connects the swing lows: the points where pullbacks stopped. In a downtrend it connects the swing highs. It shows the angle at which the trend has been moving.

• Two points draw the line. Any two lows can be connected, so two touches alone mean little.
• The third touch confirms it. When price pulls back to the line a third time and turns, the line is describing something real.
• Draw it consistently. Use either wicks or candle bodies and stick to it. Forcing a line through the middle of candles to make it fit defeats the purpose.

Channels

Draw a parallel line through the swing highs of an uptrend and you have a channel. Price moving within a channel shows an orderly trend: rallies stall near the upper line and pullbacks hold at the lower one.

Why trendlines work

A trendline is a moving version of support or resistance. In an uptrend, it marks where buyers have been stepping in, a little higher each time. Traders who see the line place orders near it, which makes the line matter more.

What a break tells you

When price closes below a rising trendline, the trend can no longer be rising at that angle. That is all a break tells you on its own. The trend may continue more slowly, move sideways, or reverse. Check the swing structure: a break followed by a lower low carries more weight than a break followed by a new high.

Steep trendlines break sooner than shallow ones. A very steep line usually describes a burst, not a trend.

Trendlines inside patterns

Many chart patterns are simply two trendlines.

• Triangles and wedges are two lines that converge.
• Flags are short channels that slope against the trend.

Common mistakes

• Adjusting the line to fit. If you keep redrawing a line to avoid a break, the line was broken.
• Treating any break as a reversal. A break ends the current pace; it does not set a new direction.
• Ignoring the timeframe. A trendline on a 5-minute chart and one on a daily chart are very different things.