Trading Price Action Trends

Part II

Trend Lines and Channels

Although many traders refer to all lines as trend lines, it is helpful to traders to distinguish a few subtypes. Both trend lines and trend channel lines are straight, diagonal lines that contain the market's price action, but on opposite sides, forming a channel. In a bull trend, the trend line is below the lows and the trend channel line is above the highs, and in a bear trend, the trend line is above the highs and the trend channel line is below the lows. The lines defining the channel most often are parallel or roughly parallel, but are convergent in wedges and most other triangles, and divergent in expanding triangles. Trend lines most often set up with trend trades, and trend channel lines are most helpful finding tradable countertrend trades. Curved lines and bands are too subjective and therefore require too much thought when you are trying to place trades quickly.

A channel can be up, down, or sideways, as is the case in a trading range. When the channel is sideways, the lines are horizontal and the line above is the resistance line and the line below is the support line. Some stock traders think of a resistance line as an area of distribution, where traders are exiting their longs, and support lines as an area of accumulation, where traders are adding to their longs. However, with so many institutions now shorting as much as they are buying, a resistance line is just as likely to be where they are initiating a new short as it is that ...