What is Trendline & Channels? You should know about it.

  • 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.
  • Channels
  • 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.

2 Responses

  1. […] Triangles are one of the most well-known chart patterns used in technical analysis. The three most common types of triangles, which vary in construction and implications, are Symmetrical Triangle, Ascending Triangle and Descending Triangle. These chart patterns are considered to last anywhere from a couple of weeks (ideally more than 12 weeks) to several months. These are areas of consolidations after a trending move and are generally continuation patterns, i.e. the erstwhile trends resumes after the breakout. However, in certain cases they act as reversal patterns. They can appear both in up-trend and down-trend. […]

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