What is a Trendline?
A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trendlines are a visual representation of support and resistance in a trending market. An uptrend line is drawn by connecting at least two higher lows, and it acts as support. A downtrend line is drawn by connecting at least two lower highs, and it acts as resistance.
How to Draw Trendlines
To draw a valid trendline, you need at least two points, but a third point confirms its validity. The more points that touch the trendline, the stronger and more reliable it is considered to be. It is important not to "force" a trendline to fit the market. If it doesn't fit neatly, it's likely not a valid trend.
What is a Price Channel?
A price channel is created by drawing a second line parallel to the main trendline. In an uptrend, this channel line is drawn parallel to the uptrend line, touching the pivot highs. In a downtrend, it is drawn parallel to the downtrend line, touching the pivot lows. The area between the two lines is the channel. Traders can use channels to identify potential areas to buy (near the bottom of the channel) and sell (near the top of the channel).
Trading with Trendlines and Channels
The most basic strategy is to trade in the direction of the trend. This means looking for buying opportunities when the price pulls back to an uptrend line, and looking for selling opportunities when the price rallies to a downtrend line. A decisive break of a trendline can signal that the trend is ending or reversing.
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