Trendlines, Channels and how they work.
We know that trading is based on the use of previous data to help us predict current or future price movement. The most important aspect is support and resistance. We call it a technical barrier because we don’t want to confuse you by thinking, ‘Is this support? Was it support? It was support but now it’s resistance, and resistance was now support’. All these thoughts may run through your head before entering a trade, and that is exactly the reason why we simplify the terminologies by using one word.
Technical barriers are everywhere in the markets, and the market conditions base themselves and their turning points on past technical barriers that come into play in the current market. We just need to know what type of market we are in (uptrend / bullish or down trend / bearish), and what kind of technical barriers to look out for to take advantage of!
In this section, forex training for intermediate traders, we will be introducing another technical barrier which is called a ‘Trendline’.
Trendlines are very basic and quite easy to trade with, if you can find the relevant levels early enough. Trendlines also act as a technical barrier in a sense that, when price approaches the level of a trendline and reacts to it, it should turn and continue its trend. Trendlines also help us to identify whether the trend is weakening for us to be cautious and not enter in a trend which is starting to turn.
We only draw trendlines in trending markets to predict the strength of trend and when it should end or reverse.
How to draw trendlines.
As we l know, there are rules in trading, and we need to adhere to these rules in order to structure our analysis and assumption of the markets. Below are two examples of standard trendlines, and where to draw them.
In an uptrend we draw and connect our trendlines from our lows, as this will act as a support level for an uptrend and therefore, we wait for price to come down and make a higher low so we can go long until the
In a downtrend we draw and connect our trendlines from our highs, as this will act as a resistance level for an uptrend and therefore, we wait for price to come up and make a lower high so we can go long until the lower low.
Here is a summary of trendlines and the rules:
- Click on your ‘crosshair’ (ctrl + f) on your chart.
- Click and drag from one point of the chart to another (the middle number is points, so divide by 10 for PIPS).
- We use trendlines to help us predict our highs in a downtrend and lows in an uptrend. This is important because, if prices react well to these levels, we can expect the trend to continue and we can take advantage of that movement.
- They act as resistance in a downtrend and support in an uptrend.
- We need to confirm the start of a trend first before drawing these lines.
- If price holds in these trendlines and doesn’t go above or below the lines, we can assume price is still trending strongly.
- We connect our trendline to the highs in a downtrend, and lows in an uptrend.
The best way to understand trendlines is to view our practical video for a more in depth look at these.
Channels and how they work.
This section is going to be very brief as channels are very easy to understand if you know how to use trendlines, so make sure you are comfortable with what trendlines are and you understand how they work / why we use them in trading.
A channel is just another trendline drawn parallel to your original trendlines. Channels help us to see the overall intention of the trend and where we can expect the trend to produce retracements. It is also very effective to use channels to help you see trend reversals or continuations.
Breakout trading is a very popular way to trade as it can be extremely rewarding if you are able to identify and have enough patience to wait for the opportunity of a breakout.
A breakout essentially means that price has been sitting or stuck on or close to a technical barrier (support / resistance) for a certain period and it starts building up momentum within itself and, when it gathers enough ‘steam’ it will move extremely quickly in one direction or another. Breakouts occur when price doesn’t know where it wants to go when reaching a form of a technical barrier which we have learned about. There can be several types of breakouts: Trendline, channel, support, highs, lows, resistance, Fibonacci levels etc…
All of these types of breakouts use the same rules to be traded, as we have said, there are different types of technical barriers in the market, but they all affect price in the same way. Price will either turn at a strong level, or breakout of it… and a breakout is a great opportunity to catch a potentially big movement.
Rules for breakout:
The rules for breakouts stay the same no matter what type of breakout it could be. You need to follow these rules and be patient enough to wait for confirmation (just like anything we analyze).
- Wait for the candlestick to close above or below the technical barrier
- Wait for 4 candlesticks to close outside of the technical barrier (above or below).
- Wait for the retest of the level it broke.
- Confirm your entry with a candlestick confirmation.
It is much easier for everything to be explained practically on the videos you received as it shows live market conditions. You can refer to this handbook for the basic rules and instructions for trading all the mentioned aspects, but it is recommended that you focus on learning through the video explanations as they are more detailed.
Breakout 2 : Breakout of a trendline.
In all these examples we can see that price was supposedly and assumed to turn at a certain level, but instead, they broke out of the level, retested the level and continued in the opposing direction as to what would be expected.