Understanding Trend Lines and Channels

7 min read

A trend line is one of the simplest technical tools - a straight line connecting a series of highs or lows - but it's easy to draw poorly and easy to over-interpret.

Because it's so simple to draw, a trend line is often one of the first tools newer traders reach for, which makes understanding its limitations just as important as understanding how to draw one correctly.

Drawing a basic trend line

An uptrend line connects a series of rising lows, while a downtrend line connects a series of falling highs. The more times price has respected the line without closing through it, the more significance many traders attach to it - though this is a convention, not a guarantee of future behavior.

A trend line drawn through only two points is far less convincing than one that has been tested and respected multiple times, since more touches suggest broader agreement among participants about where the trend's boundary sits.

• Uptrend line: A line connecting a series of rising lows.
• Downtrend line: A line connecting a series of falling highs.
• Number of touches: More respected touches are generally seen as adding to a trend line's significance.

What a channel adds

A channel adds a second, parallel line on the opposite side of price, creating a rough boundary the price has been oscillating within. Price approaching the opposite side of the channel is sometimes watched as a potential turning point, particularly when it aligns with other support or resistance.

Channels are especially useful for visualising the rhythm of a trend - how far price typically swings between the two boundaries before reversing back toward the other side.

• Channel: A trend line plus a parallel line on the opposite side of price.
• Channel boundary: Price nearing the far side of the channel is sometimes watched as a turning point.
• Confluence: A channel boundary aligning with other support/resistance adds to its significance.

Common mistakes

The most common error is forcing a line to fit a desired conclusion by choosing which highs or lows to connect after the fact.

A trend line is more useful when drawn using the most obvious swing points available, and revised - not redrawn from scratch to fit new data - as the trend develops.

• Forced fitting: Selectively choosing points to connect in order to support a predetermined view.
• Obvious swing points: A trend line is more reliable when drawn from the clearest, most visible highs or lows.
• Revise, don't redraw: Adjust an existing line as new data arrives rather than starting over each time.