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- Trendline and Channels are one of the most simple and useful tools in the market.
- During an uptrend, a trendline is formed by joining lowest points of periodic pull-backs, defined as secondary moves in the previous section. The up-trend line has positive slope.
- To be precise we need two lows to join to form a trendline during an up-move.
- This line is then extended in the upward direction; the third move towards the trend-line is used to validate the trend line.
- If the trend line is not broken in the pull back, then it is called trend-line validation.
- It is often observed that price pulls back towards the trend line and moves higher.
- In an uptrending market it is often easier to make money if one buys near the trend line and sells higher.
- The more number of time the trend-line is validated, more important it becomes.
- An upward trend line is said to be the area of support.
- The selling pressure meets the buying pressure here and eventually overtime when buying pressure is higher than selling pressure price sees an upward bounce.
- Now when one buys he or she is looking for the prices to move higher. But this may or may not happen.
- Hence the investor should maintain a stop loss point below which he-or she should cut his position, i.e. book loss.
- When a trend line is broken, either the market may reverse the trend, continue the uptrend with little less force or just go sideways.
- Similarly, during a down-trend: a trendline is formed by joining pull-back highs. They slope downwards.
- Just like an up-trend line a down-trend line is formed by joining two points and then extended in downward direction.
- Pull backs towards the trend-lines are low risk points for short selling with a stop loss little above the trend line.
- More number of times the line is validated, more it grows in importance.
- Similar to an uptrend-line, when a down trending trend line is broken the trend may continue with less pace, or reverse or may go side-ways.
- A downward trend line is said to be area of resistance.
- The selling pressure meets the buying pressure here and eventually overtime when selling pressure is higher than buying pressure price sees a decline.
- The concept of channel is much similar to trend lines.
- When in an uptrend or in a down trend or in a consolidation, we see rhythmic movement in form of parallelogram, we can draw channels.
- The channel boundaries are good points for reversal trades with small stop losses.
- Once price is out of the channel, the trend or range of the stock is broken.
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