Lesson 4: Trendlines and Channels

Trendlines are an important concept in technical analysis and is a must for forex trading. That is because trendlines are useful in the following ways:

• Trendlines are used to tell trend
• Trendlines are used as support and resistance levels

Trendlines tell the direction of price movement

The gradient of a trendline tells the direction of trend and its strength. Here are some easy rules to follow:

1. A positive trendline indicates an uptrend, a negative trendline shows a downtrend
2. The steeper the gradient, the stronger the trend
3. Steep trends are easily violated
4. Gentle trends give clue to potential reversal
5. When trendlines are violated, they signal that a previous trend may be ending

Trendlines tell support and resistance

Trendlines indicate levels where price may pause or reverse. These are good entry or profit taking levels. They should be used in the following manner:

1. When price is on top of a trendline, the trendline serves as potential support
2. When price is below a trendline, the trendline serves as potential resistance
3. Support and resistance can be interchangeable
4. Always assume support and resistance to be valid until broken

Application

Trendlines are drawn by connecting turning points. Turning points are also support and resistance levels. Usually trendlines connect top to top points and bottom to bottom points. Only clear recognizable turning points should be used. When clear points are used the lines drawn are recognizable and should be drawn by everyone else in the market.

In an market like the forex where many traders are trading using intra-day timeframes, trend can be notoriously difficult to read. Trendlines can solve this problem. That said, many trendlines exist concurrently in the intra-day chart so traders need to be able read trendlines correctly. Start with big recognizable trends that are still valid and work downwards to see whether price is in a sub-trend.

Channels

In addition, because the forex market has consistent symmetry, equidistant channels can easily be found. Equidistant channels are parallel channels. They are useful because of high frequency of occurrence. They are easy to spot because most professional software like MT4 has a equidistant channel drawing tool.

Trendlines and channels make sense of price trend