TREND LINES AND
CHANNELS
Trend Lines
Trend lines are probably the most common form of technical analysis used
today. They are probably one of the most underutilized as well.
If drawn correctly, they can be as accurate as any other method.
Unfortunately, most traders don’t draw them correctly or they try to make
the line fit the market instead of the other way around.
In their most basic form, an uptrend line is drawn along the bottom of
easily identifiable support areas (valleys). In a downtrend, the trend line
is drawn along the top of easily identifiable resistance areas (peaks).
Channels
If we take this trend line theory one step further and draw a parallel line
at the same angle of the uptrend or downtrend, we will have created a
channel.
To create an up (ascending) channel, simply draw a parallel line at the same
angle as an uptrend line and then move that line to position where it
touches the most recent peak. This should be done at the same time you
create the trend line.
To create a down (descending) channel, simple draw a parallel line at the
same angle as the downtrend line and then move that line to a position where
it touches the most recent valley. This should be done at the same time you
created the trend line.
When prices hit the bottom trend line this may be used as a buying area.
When prices hit the upper trend line this may be used as a selling area.
In short,
When the market moves up and then pulls back, the highest point reached
before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started
back is now support.
In their most basic form, an uptrend line is drawn along the bottom of
easily identifiable support areas (valleys). In a downtrend, the trend line
is drawn along the top of easily identifiable resistance areas (peaks).
To create an up (ascending) channel, simply draw a parallel line at the same
angle as an uptrend line and then move that line to position where it
touches the most recent peak.
To create a down (descending) channel, simple draw a parallel line at the
same angle as the downtrend line and then move that line to a position where
it touches the most recent valley.
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