Trend, Trendlines and Channels

Beginner

In this Master Academy educational video and article, we are introducing the concept of Trend, Trendlines and Channels.

What is Trend?

Markets tend to move in a general direction or trend

An Up Trend

  • An up trend is a sequence of higher highs and higher lows
  • In an up trend, price will rally to a high (peak), then sell off to a low (trough)
  • A market in an up trend has each peak in the rally reaching a higher level than the previous peak
  • Each low in the rally must be higher than the previous rally low

Up Trend

A Down Trend

  • A down trend is a sequence of lower highs and lower lows
  • In a down trend, price will selloff to a new low (trough), then rally to a high (peak)
  • A market in a down trend has each low in the selloff reaching a lower level than the previous low
  • Each high in the selloff must be lower than the previous selloff high

Downtrend

Trend Lines

  • Technical analysis is built on the assumption that prices trend
  • A trend line is a straight line that connects two or more price points to represent the trend in the market
  • The Trend line extends into the future to act as a line of support or resistance
  • Trend lines are used to show trend direction and critically used in the identification of trend extension or reversal
  • The more points used to draw the trend line, the more valid is the support or resistance represented by the trend line

Up Trend Line

  • An up trendline is drawn off the lows of an upward trend
  • It has a positive slope
  • It is formed by connecting two or more low points
  • Then with a third, confirming touch
  • This line represents the market support every time it moves from a high to a corrective low
  • As long as prices remain above the trendline, the uptrend is considered solid and intact
  • A break below the uptrend line indicates that the trend has weakened and a change in trend could be imminent

Up Trendline

Down Trend Line

  • A down trendline is drawn off the highs of an downward trend
  • It has a negative slope
  • It is formed by connecting two or more high points
  • Then with a third, confirming touch
  • This line represents the market resistance every time it moves from a low to a corrective high
  • As long as prices remain below the trendline, the downtrend is considered solid and intact
  • A break above the down trend line indicates that the trend has weakened and a change in trend could be imminent

Down Trendline

Channels

  • A channel is a parallel line drawn in relation to either an up or down trend line
  • This parallel line, should be drawn off the first, notable reaction high in an up trend and reaction low in a down trend
  • In the examples below, the trend line is first drawn between points 1 and 2.
  • Then, the channel is a parallel line to the trend line and placed at the swing high or low between points 1 and 2, point 3.

Up Channel

Up Channel

Down Channel

Down Channel

Steve Miley

Editor in chief

Steve Miley has 29 years of financial market experience and as a seasoned expert now has many responsibilities. He is the founder, Director and Primary Analyst at The Market Chartist, the Editor-in...continued

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