What are Trend Lines and Price Channels?
Trend Lines and Price Channels are arguably the most important technical analysis tools available. They are vital for both trend identification and confirmation of trends and this applies regardless of the time frame. That means they are another tool we consider vital before you can start thinking about making money!
Let’s start with Trend Lines:
A Trend Line is simply a straight line which always connects two or more price points. Ideally it would not be broken by any candle or bar and be straight but this is not always possible (remember: technical analysis is as much art as science). Once drawn the purpose is that it needs to be extended into the future. Traders then use the line to alert them to areas of potential support or resistance. Looking at the direction of price movements, there are two different types of Trend Lines, uptrends and downtrends.
An Uptrend has a positive slope; therefore, the second low must be higher than the first. To draw an Uptrend line, you need to connect the low points (‘valleys’) which will act as a support line. An Uptrend can be interpreted as an increase of demand combined with a rising price. The trend remains until the price closes below the Trend Line. If that happens, it could signify a change in trend.
A Downtrend has a negative slope and so the second high must be lower than the first. To draw a Downtrend line, you need to connect the high points (peaks) which will act as a resistance line. A Downtrend can be interpreted as an increase of supply combined with the price falling. The trend remains until the price is above the Trend Line. If the Downtrend line is broken (as you can see below), it could signify a change in trend.
How to look at a Trend Line
A Trend Line helps you to determine the direction and level of price movement. When the price gets back near to the Trend Line, some traders will want to look for a bounce (in an uptrend). However, Trend Lines cannot last forever, but will sooner or later break. Traders who are expecting a bounce, are usually those employing a ‘trend following’ strategy which means they should only look to buy at bullish support lines and sell at bearish resistance lines. However, there are other strategies which may focus on a break of a Trend Line i.e. ‘breakout’ strategies, so one should always employ caution at these times!
After this explanation of Trend Lines, it is important to also clarify the role of Price Channels:
A Price Channel uses two Trend Lines: one for the price highs and one for the price lows. Price Channels help you see where the levels of ‘support’ and ‘resistance’ are. The upper Trend Line identifies the resistance and the lower marks the support. The slopes of Price Channels can be negative or positive. A Price Channel with a positive slope is known as a bullish Price Channel, and a Price Channel with negative slope, a bearish Price Channel. For a bullish Price Channel, the lower line represents the main Trend Line, while the upper is called channel line. For a bearish Price Channel, the opposite applies.
Interpretation of Price Channels
Price Channels are a very clear representation of the direction of the trend and can help predict certain price action, as for example with the bullish Price Channel below. Price Channel strategies are based on the same methodology as Trend Lines. Some traders (according to the trend following strategy) look to buy (go long) when the prices reach main Trend Line support in a bullish Price Channel.
One final thing to remember; as mentioned above, technical analysis is not an exact science and Trend Lines and Price Channels are no different. Most of the time, you will not be presented with prices that correspond exactly with where you’d like them to appear on a chart...it is up to you to use best judgment and make an informed decision!
Setting up Trend Lines and Price Channels in your Skilling platform
If you want to draw a Trend Line in your charts, click on the trendline button which is the second from the top in the chart’s toolbox (located on the left side of your chart). Once you have clicked on it, you should be able to start drawing lines into your chart with your cursor.
If you want to place Price Channels, click on ‘Equidistant channel’ button which is the third one in the toolbox. You can easily modify both, if you click on the line and drag it, or grab one end point of the line and place it in its new place.
Trend Lines and Price Channels are a key and vital part of trading. Not only that, they are probably the place where you should actually start to learn about technical analysis (TA). Virtually every other aspect of TA is impacted by Trend Lines, so make sure to master this area of Technical Analysis (TA)!