Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices together or show some data’s best fit. The resulting line is then used to give the trader a good idea of the direction in which an investment’s value might move.
A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trendlines are a visual representation of support and resistance in any time frame. They show direction and speed of price, and also describe patterns during periods of price contraction.
A trend is when prices move in a zigzag fashion but still follow an imaginary path or a trend in one direction. The trend can be further defined by a trend line. Trend lines connect significant lows in an uptrend and they connect significant highs in a downtrend, creating dynamic resistance. Dynamic resistance means that as time changes, so does the price of the support or resistance. For instance, in an uptrend, the level of support goes up as time progresses. In a downtrend, the level of resistance goes down as time progresses.
An uptrend is identified when there are higher highs and higher lows as time passes; A downtrend is identified when there are lower highs and lower lows.
Another thing to look for is channels. Channels are comprised of two parallel trend lines with prices bouncing between them. The typical strategy is to sell at top of the channel and buy at the bottom of the channel.
Why are Trend Lines and Channels important?
Usually traders look for patterns in the trend that create trade opportunities. Channels provide a context in which high-probability patterns are identified. In addition to trading with the trend, traders may sell off of the top of the channel or buy off of the bottom of the channel regardless of trend direction.
If a pattern (Gartley, butterfly, etc.) converges with a trend line, it greatly increases the probability of a successful trade opportunity.