Trendlines and channels

In simple terms

A trendline is a straight line drawn along a trend's swing points. In an uptrend it joins rising swing lows; in a downtrend it joins falling swing highs. It works like a sloping version of support and resistance: a line along which buying or selling has tended to appear as the trend progressed.

A channel adds a second line, parallel to the first, through the swings on the other side, so that the price appears to move within a band.

Drawing a trendline by a rule

Because people tend to draw lines that fit what they hope to see, it helps to use a written rule. For example:

1. Choose the timeframe and scale first.
2. Identify swing lows (for an uptrend) using a fixed rule, such as the 5% rule in the market structure lesson.
3. Draw the line through the first two clear swing lows of the trend.
4. Decide in advance whether to use candle wicks or closing prices, and stick to it.
5. Treat a third touch as confirmation that the line has described the trend so far, not as proof it will continue.

Why trendlines are subjective

The same prices can produce several different, equally reasonable lines:

• Which swings? Starting from a different low changes the slope.
• Wicks or closes? Lines through wicks sit lower than lines through closes.
• Which timeframe? Daily and weekly charts have different swings.
• Which scale? On a linear scale, a steady percentage rise curves upward; on a log scale, it is a straight line. A line drawn on one scale will not be straight on the other, and will be broken at a different time.

Because of this, two careful analysts can disagree about whether a trendline has broken, and both can be right by their own rules.

Channels

Drawing a parallel line through the swing highs of an uptrend (or the lows of a downtrend) gives a channel. Channels describe the range the price has moved within. Some traders watch the upper line of a rising channel as possible resistance and the lower line as possible support. The same subjectivity applies, and channels drawn after the fact always look better than they perform.

Reading a trendline break

A break below an uptrend line shows that the price has fallen faster, or risen more slowly, than its recent path. It may be the start of a trading range, a deeper fall, or just a pause before the trend resumes. Treat the break as an observation:

• Has the market structure also changed, with a lower low?
• Did the break happen on news or on unusual volume, as the volume lesson discusses?
• Is the longer timeframe still trending?

Then, if you are testing a trading idea, write down in advance what you would do and what would prove you wrong.

Why it matters

Trendlines are among the most widely drawn chart tools, and many trading decisions rest on them. Understanding how much they depend on drawing choices protects you from treating a line you drew as a fact about the market, and from being persuaded by lines others have drawn to fit their story.

Limitations

Trendlines are subjective and backward-looking. They fit past swings by construction and say nothing certain about the future. Scale, timeframe and drawing choices change them, so their "breaks" are partly artefacts of how they were drawn.

Common mistakes

• Drawing the line after deciding what you want it to show.
• Mixing wicks and closes in the same line.
• Ignoring scale on long charts.
• Treating a break as a certain reversal.

Try it yourself

1. Choose a share that has risen for at least a year.
2. Draw an uptrend line through two swing lows on a linear daily chart, using closes.
3. Redraw it using wicks, then on a log scale, and note when each line was first broken.
4. Write down which rule you would use in future, and why.