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Trendlines & Trend channels trading strategy

 On today’s article I’ll write about a different form of support & resistance I trade & it is called “TRENDLINES”. As the name states, you’ll find this form of analysis only in a TREND & with a straight line we define the trend on charts hence it is called TRENDLINES.

To understand this article properly, you must understand what support & resistance is & I explained this part here in my blog.

 

 

There are two types of trendlines we may draw –

1) Upper trendline or resistance trendline

2) Lower trendline or support trendline

 b21) Upper trendline / resistance trendline :

When two resistance points are connected with a straight line is known as upper trendline or resistance trendline.

In pic, 1 2 3 points are resistance points. When we connect 1-2-3 resistance points, we get a straight line which is called upper trendline or resistance trendline. So we need minimum 2 points to draw a trendline & here the two points are 1 & 2.

 

 

b32) Lower trendline / support trendline :

When two support points are connected with a straight line is known as lower trendline or support trendline.

In pic, 1 2 3 points are support points. When we connect 1-2-3 support points, we get a straight line which is called lower trendline or support trendline. So we need minimum 2 points to draw a trendline & here the two points are 1 & 2.

 



How to draw TRENDLINES ????????????????

Lets understand this concept with chart examples. First of all, we need to find a stock which is in a trend.Lets take SSLT(sesa sterlite limited).

Below is a chart of SSLT & the stock is in clear downtrend.One of the key ways to find a downtrend is you’ll start seeing more selling pressure & less buying pressure means price will fall more & will rise less.So our first task is completed – We found a trendy stock where we will draw trendlines hereon.

 Now i’ll have to find out the points from where price has fallen down.From below chart we can see point 1 is the 1st area from where price started falling & then price raise upto point 2 & fallen down from there.Now when i connect point 1 & 2, i got point 3,4 rejecting from the same line i’ve drawn connecting point 1 & 2. So we’ve drawn a resistance trendline/upper trendline which we extended forward after adding point 1-2-3-4 to project our possible next point of resistance from where price may fall again hence we’ll look for sell signal there on the upcoming line area.

 In below chart, we can see price to reject again from our projected trendline where we’ll be looking for SELL signals as per trendline trading. Since the trendline is responding well enough as resistance area, we’ll extend the trendline connecting 1-2-3-4-5 ponts & will project the next level of resistance where again we’ll look for sell signal.

On chart, we can see price again rejected from our projected level of resistance trendline which is point 6 & had fallen down sharply. So this is how we draw trendlines & on every retest of this line we can look for a possible trading opportunity.

 Below is a chart example i’ve shown to explain how trendline helps in finding targets even when we are trading a resistance or lower trendline.In a professional stage, when you learn trading the market against it’s trend(not recommended for newbies), we use such kind of trendline setups to enter the market. Have a look in below chart – BHEL is in a strong downtrend as the falls are higher than the gains.Point 1 & 2 are the support points from where price pushed up.Now i’ve simply added points 1 & 2 & drawn a trendline & as i’ve added the support points hence it will be called as support trendline or lower trendline.Once i’ve drawn the trendline,now i’ll extend the line further & wait for price to move back down on the drawn line where we can hunt a buy signal for a push up.

In below chart ,we can see price reacted on our projected support trendline at point 3 & pushed back up. Since price respecting the support trendline drawn by connecting 1-2-3, we’ll again extend the line forward & again wait for price to come back on the trendline from where price is expected to move back up.

In below chart, we see price pushing back up after testing the support trendline & this is how we can keep extending the line to trade with it.

Now,if you see the entire chart with both the trendlines, it will look like below chart which is called a BEARISH EQUIDISTANT CHANNEL.

The equidistant channel is formed when price action finds support and resistance between two parallel trend lines. The term “equidistant” can be translated as, “of equal distance”. This refers to the parallel trend lines that are of equal distance apart from one another. The channel can be bearish or bullish.Below chart example represents a bearish equidistant channel where both the trendlines are heading down:

Now , here is an example of a bullish equidistant channel  where both the trendlines are heading upwards only :

EQUI-DISTANT CHANNEL — How to trade it ?????????

An equidistant channel represents a strong & stable trend’s presence in stock.So whenever you find an equidistant channel going on in a stock,you must follow the channel’s tops & bottoms to trade the stock. In a bullish equidistant channel – always look for price action buy signals when price reaches the lower or support trendline with a target of resistance trendline area & in a bearish equidistant channel, always look for price action sell signal when price reaches higher or resistance trendline area with a target of support trendline area.

PROJECTING TARGET area using equi-distant channel lines :

 Let us understand this topic with chart examples.In below chart, we found a start of an uptrend momentum(as gains are higher than the losses in price momentum) with points 1 & 2 hence we’ve drawn a trendline connecting both the points.

 Now if we want to define a target area for the current price’s upward momentum, we’ll have to use the concept of equidistant channel. To draw equidistant channel, we need to draw a parallel trendline as drawn for support trendlines with 1&2 & leave it on the current resistance point which is point A. Now we’ll extend the resistance trendline A further to project the price target area for the recent upmove started from point 2 area.

 In below chart, we can see price reached our extended line from A resistance point & rejected from there. So this is how we can project target ares with the help of equidistant channel.

WHEN THE TREND IS OVER ??? :

Below is a chart example for showing you when we can understand a support trendline or an equidistant channel momentum is over. The stock was running up strongly in a bullish equidistant channel for last few months & after a long run it came out of the channel(marked as a box in RED). Once price is out of the channel or the trendline, there is a possibility that price is changing it’s existing trend (from uptrend to downtrend) or price may move in a flat market condition to take a pause before it’s next move up.But in any way, existing momentum of the stock will be over for now once price breaks current trendlines or a trend channel.

 Below is a chart example , when price came out of a bearish equidistant channel or a resistance channel & started a new uptrend. Red box marked when price came out of existing bearish trendline or equidistant channel.

 I’ve uploaded below a video to show you how to draw the trendlines & channels on chart :

 Finally, Drawing & trading trendlines,trendchannels etc need lot of practice & cannot be learnt overnight.So keep patience & try to find these lines on charts as many as you can.While you are drawing the lines, you need proper guidance to do the corrections & that is what we do in financialhubindia member’s area.Apart from all discussed topics we work on some other areas of trendlines & trendchannels while trading like:

= Using trendlines as flip levels.

= Different form of channels to define target

= Channel or trendlines strength on a chart

= Finding a quality channel or trendline………… & more

December 17, 2014

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