Trends & channels

Trend lines

As you may have noticed already, the market does not move in perfect straight lines. It is always fluctuating and oscillating, creating new highs and lows all the while.

It is for this reason that we must learn how to draw trend lines on a chart so that we can have a better chance at predicting where the new support and resistance zones will be.

Trend lines are likely the most common out of all the forms of technical analysis that you will see forex traders use. They are simple but very effective.

The two most common trend lines that we will draw on our chart will be on the uptrends and downtrends that we spot in the market – that way we can more easily visualise the trend.

How to draw a trend line?

Luckily this is pretty simple. All you have to do is find two major tops or two major bottoms in the market and connect the two points. It really is as easy as that.

Here are a couple of examples:

Uptrend

 

For an uptrend, we draw the trend lines underneath the structure along clear support points that we observe the price to rebound from.

Downtrend

In a downtrend, we draw the trend lines on top of the market structure along the clear resistance points that we observe the price to rebound from.

Not all trend lines are made equal

It is important that you understand the validity of the trend lines that you’re drawing. Just because you have connected two points in the market it doesn’t mean that this will be an obvious point of support or resistance.

In fact, most traders would not consider the trend to be valid until the price hits the trend line at least three times.

Here are some simple rules to keep in mind when assessing the validity of your trend lines:

  • The more times that the trend line is tested and successfully holds, the more valid it becomes. Imagine that the line becomes stronger each time it successfully resists the price movements.
  • You need two clear tops or bottoms to draw a valid trend line, but this is the weakest possible trend line you can get. It takes at least three to form a valid trend line.
  • Horizontal lines are the strongest. The steeper the trend lines become, the less likely the are to hold their level.

TIP: Do not force trend lines onto your chart. Far too often people will draw trend lines to try and support their own theories. These should be OBJECTIVE lines that clearly fit onto the chart. If you’re forcing it, then it almost certainly is not a valid trend line.

The trend is your friend

We have already mentioned this famous cliche once in our course, but it’s worth mentioning again. The trend IS your friend – seriously.

Many novice traders will try to predict moments of market reversals by constantly trade AGAINST the market. As trading is technically a zero sum game, it may seem counterintuitive to “follow the crowd” and trade with the trend but that is exactly what you must do if you are to be successful.

Typically, traders will see that the market is rising and will assume that this cannot and will not continue for much longer. If it is going up, it must come back down. And while that is true, it is exceptionally hard to pick a point of a reversal.

Put it this way, it is extremely difficult to predict a trend in advance when compared to identifying one that is already there.

This often goes against a lot of traders grains, which is potentially why so many people end up losing money in the market.

Experience shows that it is MUCH easier to profit by taking advantage of a current market trend rather than trying to accurately predict a new one. Why make it harder for yourself when you don’t have to?

Channels

When we draw a trend line, we are simply drawing one line on the chart to identify and uptrend or downtrend.

To create a channel, we draw two lines for the same trend, these act as the upper and lower trend lines. These upper and lower trend line signify the market support and resistance zones.

We use channels to gain a better perspective on the market structure and it will usually signify logical points to enter and exit our trades. These can be some of the easiest and most profitable trading situations that you encounter, you just have to be able to spot them accurately.

Note: For a channel to be valid, both of the trend lines must be parallel to each other. Most chart software will have a channel drawing tool to help you do this.