Trendlines and channels

Drawing the trend

In the last lesson you learned to spot a trend by comparing peaks and dips. A trendline makes it easy to see in one glance.

• In an uptrend, draw a straight line along the dips (the higher lows).
• In a downtrend, draw a straight line along the peaks (the lower highs).

Think of it like a ramp. In an uptrend, price walks up the ramp, steps on it, and keeps climbing.

How many touches?

• Two touches are enough to draw a line. Any two points make a line, so it doesn't prove much yet.
• A third touch is what makes traders take it seriously. Now lots of people are watching the same line.

Channels: a lane for price

Now draw a second line, parallel to the first (the same slant), along the peaks. The two lines make a channel, a lane that price travels in. It's like a bowling lane with bumpers on both sides.

Look at the circles. Price touches the bottom line, bounces up, touches the top line, and dips back down, again and again, while the whole lane climbs.

How traders use them

• Near the bottom line of an up channel, price is at a "cheap" spot inside the lane. Some traders watch for buying clues there.
• Near the top line, price is at a "pricey" spot inside the lane. Traders who already own may take some profit.
• When price breaks the trendline, it's a warning that the trend may be slowing down. It's like the ramp collapsing under your feet.

Tips for drawing

• Wicks or bodies? Some traders draw lines through the wicks, some through the bodies. Either is fine. Just pick one way and stick with it.
• Don't force it. If you have to cut through lots of candles to make your line fit, it's not a good line.
• Steep lines break fast. A trendline that is almost straight up can't last long. Gentle slopes tend to hold longer.

What goes wrong

Trendlines are drawn by people, so two traders can draw two different lines on the same chart. That's why a trendline is a guide, not a rule. Price often pokes through a line by a little and then comes back. And when a trend ends, the line breaks, sometimes very suddenly.

Remember

• In an uptrend, draw the line along the dips. In a downtrend, along the peaks.
• Two touches draw a line. A third touch makes it matter.
• A channel adds a parallel line on the other side, making a lane.
• A broken trendline is a warning that the trend may be slowing.