Lesson 12: Highlight Forex Trends with Trending Lines and Channels

Trendlines are, in a sense, "oblique" or "mobile" supports and resistances.

Tracing rules

An upward trend line is traced by linking lower (troughs) increasing and aligned upward.

A downward trend line is traced by linking higher (peaks) to decreasing and aligned downward.

Link with Dow theory

Reminder: According to Dow's theory, an upward trend is made up of increasing peaks and troughs, and conversely, a downward trend is composed of decreasing peaks and troughs.

As a result, an upward trend line highlights compliance with part of this "rising version" rule (with lower growth rates), and a bearish trend line highlights compliance with part of this rule "Drop version" (with higher declines)

Use in trading

As we have seen above, a line of upward trend is a line which supports the rise in prices (by stopping the intermediate "small drops").

Conversely, a bearish trend line is a line that pushes prices down (by blocking intermediate "small increases").

The first use of trend lines is therefore to highlight trends.

Buy on a trend line up and sell on a downtrend line

Since "small declines" in uptrend trends are halted by upward trend lines, it may be worthwhile to position oneself for purchase when prices approach or touch that trend line.

Conversely, it may be advisable to position oneself for sale when prices are approaching a bearish trend line.

Play trend line breaks

It is also possible, as for holders and resistors to take advantage of breaks and crossing trend lines.

An upward trend line that is broken highlights a reversal of downward trend. In this case, it may be appropriate to position itself for sale.

Conversely, if a bearish trend line is crossed, this means that prices are going upwards and it may therefore be worthwhile to position themselves for the purchase.

Precision on tracing rules

We have discussed above the rules governing the tracing of supports and resistances. Now that we have seen how to use these tools, it is possible to explain the reasons for these rules.

Indeed, if a bearish trend line were drawn by connecting peaks, it could only be used to position itself at the time of purchase, and therefore in the opposite direction to the trend highlighted by the line. 
Conversely, if we traced a trend line upwards linking higher, this one could only provide us with sales signals, prompting us to position ourselves against the trend.

Trend channels

The trend channels are made up of two parallel lines bordering the course, a line connecting the highest peaks while the other connects the lowest ones.

Like the trends themselves, the channels can be bullish, bearish or horizontal.

Link to Dow's theory

The upward channel highlights a perfect respect of the Dow theory (rising and falling rule), rising version, since not only are the peaks and troughs increasing but also perfectly aligned. It should be noted here that we can also consider that we are facing an "evolution" of the upward trend line . Indeed, the bullish channel is simply composed of an upward trend line, and its parallel.

The bearish channel highlights a perfect respect of the Dow theory (lower and upper rungs), a lower version, since not only are the peaks and troughs decreasing but also perfectly aligned. It should be noted here that we can also consider that we are facing an "evolution" of the bearish trend line . Indeed, the bearish channel is simply composed of a bearish trend line, and its parallel.

Finally, the consolidation channel is a "special case" of the rule of the highest and the lowest , since neither the upper and lower bullish rule nor the bear rule can be applied. It can be noted here that, finally, the consolidation channel is composed of a support and a resistance that appear simultaneously.

Use in trading

For all channels, "back and forth" can be made within the canal , by selling near the high marker, to buy near the low marker.

As a result, we sometimes find ourselves positioning in the opposite direction of the trend, and we must therefore remain particularly vigilant in the bearish positions taken within the bullish channels and in the bullish positions taken in the bearish channels.