Trend lines are a kind of “biased” or “moving” support and resistance.
The traceability rules
An uptrend line is drawn by connecting rising and rising lows (lows).
A downtrend line is drawn by connecting the highs (highs) to the descending and descending lines.
Link to Dow’s theory
I remember : According to Dow’s theory, an uptrend is made up of rising peaks and lows, and conversely, a downtrend is made up of decreasing peaks and troughs.
Therefore, an uptrend line shows that part of this “upside” rule is met (with rising lows) and a falling trendline shows that part of this rule is met. “lower version” (with maximum descendants)
Use in trading
As we have seen above, a bullish trend line is a line that supports rising prices (stopping the “small drops” in between).
Conversely, a downtrend line is a line that pushes prices down (blocking the intermediate “small lifts”).
The main use of trend lines is therefore to highlight trends.
Buy on an uptrend line and sell on a downtrend line
Since the “small dips” of the uptrend are stopped by uptrend lines, it might be interesting position yourself to buy when prices approach or touch this trend line.
On the contrary, it might be wise to do so position yourself for sale when prices approach a downtrend line.
Playback of trendline breaks
It is also possible, as for supports and resistances, to exploit breaks and intersections of trend lines.
An uptrend line that is broken highlights a downtrend reversal. In this case, therefore, it may be appropriate to position yourself for the sale.
Conversely, if you cross a downtrend line, it means that prices are going up and it could therefore be interesting to position yourself to buy.
Clarification of the traceability rules
We have previously mentioned the rules governing the tracking of supports and resistances. Now that we have seen how to use these tools, it is possible to explain the reasons for these rules.
In fact, if a downtrend line was drawn by connecting the peaks, this could only be used to position for the purchase, and therefore in the opposite direction to the trend highlighted by the line.
Conversely, if we plotted an uptrend line by connecting the highest, it could only provide us with sell signals, encouraging us to position ourselves against the trend.
Trend channels consist of two parallel lines framing the price action, one line connecting the highs (peaks) while the other connects the lows (lows).
Like the trends themselves, the channels can therefore be bullish, bearish or horizontal.
Link to Dow’s theory
The bullish channel highlights a perfect compliance with the Dow theory (rule of highs and lows), bullish version, since not only highs and lows are increasing, but also perfectly aligned. Note here that we can also consider that we are facing an “evolution” of the uptrend line. In fact, the uptrend channel is simply composed of an uptrend line and its parallel.
The bearish channel highlights a perfect compliance with the Dow theory (rule of highs and lows), bearish version, since not only the peaks and troughs are decreasing, but also perfectly aligned. Note here that we can also consider that we are facing an “evolution” of the downtrend line. In fact, the downtrend channel is simply composed of a downtrend line and its parallel.
Finally, the consolidation channel it is a “special case” of the high and low rule, as neither the bullish highs and lows nor the bearish rule can be applied. We can see here that, finally, the consolidation channel is composed of a support and a resistance that appear at the same time.
Use in trading
For all channels, you can perform “back and forth” within the channelselling near the upper limit, to buy near the lower limit.
As a result, we sometimes find ourselves positioning ourselves in the opposite direction of the trend, and it will therefore be necessary to remain particularly vigilant on the bearish positions taken within the bullish channels, and on the bullish positions taken within the bearish channels.
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