Price Action Shortcuts | The Philosophy Of Trendline & Channel Trading


It is easier to see the trend on a chart after
it has occurred. Trying to identify the trend as it is developing
is much more difficult. This monthly chart shows a sustained uptrend
trend, but there is a slowing of that trend toward the end. Will the upward trend continue? Will prices begin a downward trend? Will they move sideways? The purpose of technical analysis is to apply
tools that provide the best chance of identifying the future direction of prices. If wrong, these tools also control the size
of your loss. So, it’s imperative you don’t over complicate
your analysis with useless data or indicators that don’t add value to your charts. Today, we’ll talk about trends, trend lines
and price action and I’ll show the easiest way to analyze a chart to have a better understanding
of what is really happening on it. Before we continue, if you’re new here,
make sure you subscribe, hit the notifications bell and leave a like to show your support. First of all, the time interval is a key element
when identifying a trend. Forget about 15 minutes or 5 minutes charts
and go on the daily chart. Weekly and monthly charts show the major trends
even more clearly than daily charts. Longer-term charts remove a large part the
noise that interferes with seeing the bigger picture. The most successful traders and investors
start by evaluating a weekly or monthly chart, and then apply the lines and values developed
on those charts to a daily chart. The weekly chart provides direction, whiles
the daily chart, or even the h4 or hourly charts, are used for timing entries and exits. In order to successfully determine a trend,
you must master the trend lines. Trend line analysis is often underestimated
by traders because it is perceived as being subjective. A trend line determines the current direction
of price movement, and often identifies the specific point at which that direction will
change. I would say that the trend line is the most
popular and recognized tool of chart analysis. Now, how to draw trend lines. 1. In an uptrend, you look to connect the lows
of the price. In a downtrend, you connect the highs of the
price. A valid trend line connects two or more points
that define the trend. 2. As I said before, you start drawing trend
lines on higher time frames and the carrying them forward to shorter time frames. 3. In this way, you identify the areas of support
and resistance, the most significant levels being on the higher time frames. An uptrend line has a positive slope and acts
as support. As long as the market price remains above
this trend line, the uptrend is considered intact. A close of the price below the uptrend line
suggests that a change in trend could be on the cards. A downtrend line has a negative slope and
acts as resistance. As long as the market price remains below
this trend line, the downtrend is considered intact. A close of the price above the uptrend line
suggests that a change in trend might happen. So here is a classic downwards trend line. It connects the highest price with other price
swings. When prices move through the trend line heading
higher, the downtrend has been penetrated. This may end the downtrend or cause a new
downtrend line to be drawn. In this case it was the end of the downtrend. The trend lines are basically support and
resistance lines. An upwards trend line, drawn across the lows,
is a bullish support line because it defines the lowest price allowed in order to maintain
the upwards trend. The downward trend line, drawn across the
highs, is a bearish resistance line. Proper use of these basic lines is essential
for identifying the overall direction of the market and understanding the patterns formed
as prices move from one level to another. But how do you know the relevance of a trend
line. I personally have 3 concepts I look at a trend
line: its length, its number of retests and its ascending or descending slope. So, the length of the trend line is an important
factor. A 3-4 weeks trend is of minor importance if
the trend lasts for 1-2 years, for example. A break below or above a trend line with an
important length represents an important signal. Also, a trend line is more important if it
has been retested many times. That’s why a trend line acts like a dynamic
area of support or resistance. Each line retest contributes to the importance
of support or resistance. Extending the trend line after a breakout
is very important because its role of dynamic support / resistance will reverse. This means that if an uptrend line retested
several times in the past is broken to the downside will become a resistance area. Also, if a downtrend line retested several
times in the past is broken to the upside will become a support area. In what concerns the slope, a very steep trend
is difficult to be maintained and is therefore likely to be easily broken, even by short
lateral movements. All the trend lines are eventually broken,
but the steepest trend lines are the soonest broken. Usually, from my experience a breakout of
a trend with a steep slope is more likely followed by a trend continuation than a reversal. A steep trend line is the result of an accelerated
increase or decrease in the short term. In this case, the trend line will have a higher
angle and is less likely to provide solid support or resistance. Now, once the support and resistance lines
have been drawn, a price penetration of those lines creates the basic trend signal. I prefer to add the additional rule that once
the price has penetrated a trend line, it must remain penetrated for some time period
in order to confirm the new trend because most false penetrations correct quickly. In actual trading, the price crossing the
trend line is not 100% clean. Most often, prices that have been moving higher
will cross below the trend line, then re-cross moving higher, then move lower again. The trend line is an important turning point,
and there may be indecision that is reflected in a sideways price movement before prices
reestablish a trend. To deal with this situation, you could do
one of the following: • wait a set time period to confirm that
prices remain on the new side of the trend line. • wait for a reversal after the penetration,
then enter a trade in the new direction. • create a small safety zone (called a band
or channel) around the trend line and enter the new trade if prices move through the trend
line and through the safety zone. Each of these techniques requires a delay
before entering. A delay normally benefits the trader by giving
a better entry price; however, if prices fall quickly through an upwards trend line and
do not reverse or slow down, then any delay will result in a much worse entry price or
no entry at all. Unfortunately, most of the biggest profits
result from breakouts that never pull back. That’s the reality. I know you want the textbook breakout, with
the price retesting the breakout level, but in some cases the price just keep on going
and never reaches the breakout area. Now, to get a better understanding of the
trend you could create a channel with trend lines. A channel is formed by a trend line and another
line drawn parallel to the trend line enclosing a sustained price move. The purpose of the channel is to define the
volatility of the price move and establish reasonable entry and exit points. Up to now, the trend line has only been used
to identify the major price direction. A long position is entered when the price
crosses a downward trend line moving higher. The trade is held until the price moves below
the upwards trend line. However, it is more common to have a series
of shorter trades. While the biggest profits come from holding
one position throughout a sustained trend, a series of shorter trades is also a viable
alternative if you are an active trader. Just be aware that trend lines using very
little data are essentially analyzing noise and have limited value. So before a channel can be formed, the bullish
or bearish trend line must be drawn. A clear uptrend line requires at least two,
and preferably three or more major low points on the chart. These points do not have to fall exactly on
the line. Once the trend line is drawn, the highest
high can be used to draw another line parallel to the upwards trend line. The area in between the two parallel lines
is the channel. In theory, trading a channel is a simple process. We buy as prices approach the support line
(in this case the upwards trend line), and we sell as prices near the resistance line. These buy and sell zones should be around
the bottom and top 10%-15% of the channel. If prices continue through the lower trend
line after a long position has been set, the trade is closed. In a downward trending channel, it is best
to sell short in the upper zone and cover the short in the lower zone. Buying in the lower zone is not recommended;
trades are safest when they are entered in the direction of the trend. Remember, trend following is the most profitable
and consistent trading style. The reality is that no one knows how high
or how low a market will go. No one knows when a market will move. But we can follow a trend to increase our
chances to profit from the markets. If you enjoyed this type of content, don’t
forget to subscribe, click the bell icon and leave a like to show your support. Until next time.

35 thoughts on “Price Action Shortcuts | The Philosophy Of Trendline & Channel Trading”

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