Understanding Trend Lines and Channels
By: Christopher Lewis
While support and resistance is most often found at round whole numbers, there is also another form of both in the shape of what is known as a trend line. If a support level is a horizontal line, and therefore horizontal support, then a trend line should be thought of as vertical or angular support. Needless to say, this works for both support and resistance like the horizontal levels that traders use. In fact, the similarities are many and the tools are used the same way in many aspects.
Simply put, a trend line is a sloping line in which price either has trouble rising above, or sinking below. It is much like the support and resistance levels that traders use, but is drawn at an angle. By this very definition, trend lines only occur in some form of a trend. (Hence the name.) Much like support at resistance levels, the best ones are the most obvious ones. It is also true that the trend lines that appear on higher time frames are more reliable under most circumstances. The chart below is an example of a bullish trend line, or uptrend line.
Needless to say, this can work as a bearish or downtrend line as well. Below is an example.
While this seems like a simple thing, and it really is, when you look around the internet you will see people use varying metrics in determining their trend lines, and quite frankly – a lot of mistakes. When drawing a trend line, one of the most important things to bear in mind is how many times price has touched it. For example, a trend line that has been tested twice isn’t nearly as strong as one that has been tested nine times. This is because the support or resistance that it represents has held true nine times, showing just how interested the buyers become at the line. In fact, as a general rule, many traders will insist on at least three touches.
Also, there is the question of piercing. The line can be pierced from time to time, but as long as the candle closes above an uptrend line, or below a downtrend line, it shows that the line has repelled the opposing force. This is why trend lines are best analyzed after the candles close to avoid placing an order that gets whipsawed. Some traders feel that a trend line that has been pierced is invalidated, but this really is a matter of opinion and comfort. While some traders are very rigid about it, others feel that as long as the line holds over time and at the close of the candle, that it simply proves strength. Whichever one you choose as a rule is entirely up to you.
Channels are another form of “vertical support and resistance” and can be used in much the same manner. The main difference is the unlike a trend line, it is actually a pair of them running parallel. Because of this, you will have both support and resistance going forward, as the bottom will be supportive, and the top be resistive. The same rules for a channel line apply as they do for a trend line. These paths allow the trader to see the gradual rise or fall of price over time. Think of this as a range bound market, but with a tilt. Many traders will buy at the bottom of the channel, and sell at the top, over and over until the channel gets broken out of.