• Trend Lines
  • Price Channels
  • Linear Regression
  • Trend Line Degrees
  • Speed Lines

Trend Lines

  • Trend lines are an important tool in technical analysis
  • Technical analysis is built on the assumption that prices trend
  • Trend lines used for trend identification and confirmation
  • Used to signal when a trend is changing

Uptrend Line

  • An uptrend line has a positive slope and is formed by connecting two or more bottoms
  • Two points make a tentative trend line while three or more make a valid line
  • The more it has been tested and the longer it remains intact, the bigger the significance of the trendline

Downtrend Line

  • A downtrend line has a negative slope and is formed by connecting two or more tops
  • Two points make a tentative trend line while three or more make a valid line
  • Two points make a tentative trend line while three or more make a valid line

Trend Line Degree

  • Steepness of a trend line is important
  • A trend line which is too steep indicates that the rate of ascend is not sustainable
  • A trend line that is too flat indicates that the uptrend is weak and may not hold
  • Most valid trend lines show a slope of 45 degrees

Break of an Uptrend Line

  • As long as prices remain above the trend line, the uptrend is considered solid and intact
  • A break below the uptrend line indicates weakness in the trend
  • A close below the trend line is more significant than just an intraday penetration
  • Price filter – percentage drop below the trend line
  • Time filter – one or more closes below the line

 

Break of a Downtrend Line

  • As long as prices remain below the trend line, the downtrend is considered solid and intact
  • A break above the downtrend line indicates a weakness in the downtrend
  • A close above the trendline is more significant than just an intraday penetration
  • Price filter – percentage move above the trendline
  • Time filter – one or more closes above the line

Price and Time Filters

  • The 3% rule is a long term price filter for stocks that outlines a close beyond the trend line by 3%
  • The 1% rule is a short term price filter for stocks that outlines a close beyond the trend line by 1%
  • For forex and commodities we use 1% for long term charts and 0.3% for short term charts as these securities are less volatile 
  • The 2 period rule is a time filter that outlines a close of two consecutive candles beyond the trend line

Adjustment of Trend Lines

  • Breaking of a steep trend line suggests the need of a deeper correction
  • A new trend line may prove to be more sustainable
  • A flat up trend line may prove to be too slow
  • A steeper trend line is redrawn to closely track prices

The Fan Principle

  • After a break of an uptrend line, prices might fall for a while and then rally up to retest the trend line
  • A second uptrend line can be drawn through the new trough
  • Break of the second trendline indicated further weakness and allows the drawing of a third line
  • The breaking of the third trend line signals a valid trend reversal
  • After a break of a downtrend line, prices might rise for a while and then drop to retest the trendline
  • A second downtrend line can be drawn through the new peak
  • Break of the second trend line indicated further strength and allows the drawing of a third line
  • The breaking of the third trend line signals a valid trend reversal

Bullish Price Channel

  • The return line is a line drawn parallel to the Uptrend line, drawn along the tops
  • The lines form a channel, and prices are expected to move between the two parallel lines

Bearish Price Channel

  • In a downtrend , the return line is a drawn parallel to the downtrend line along the bottoms
  • The lines form a channel, and prices are expected to move between the two parallel lines

Linear Regression Channel

  • An easy way to draw channels is by using the Linear Regression Channel
  • Linear regression line is a line that best fits all data
  • Drawn always from left to right
  • In a downtrend drawn from the ATH to the ATL
  • In an uptrend drawn from the ATL to the ATH
  • The Linear Regression Line goes through the middle of the candles serving as an average
  • Upper Channel Line: A line parallel to the Linear Regression Line
  • Drawn one or two standard deviations above the Linear Regression Line
  • Lower Channel Line: A line parallel to the Linear Regression Line
  • Drawn one or two standard deviations below the Linear Regression Line

How to Use Channel Lines

  • As long as prices advance and trade within the channel, the trend is considered bullish
  • A break above return line resistance would be bullish and indicate an acceleration
  • The first warning of a change in trend occurs when prices fall short of the return line
  • A break below the trend line support would provide further indication of a change in trend
  • As long as prices decline and trade within the channel, the trend is considered bearish
  • The downtrend line acts as a resistance area and provide selling opportunities for traders
  • The return line acts as a support zone and can be used for profit taking
  • The return line acts as a support zone and can be used for profit taking
  • A break above the trend line resistance would provide further indication of a change in trend

Trend Lines of Different Degrees

Trend lines of different degrees can be drawn

  • Major trend lines
  • Intermediate trend lines
  • Short term trend lines

Speed Lines

  • Measure the vertical distance of the trend
  • Draw first line at two thirds of the distance
  • Draw second line at one third of the distance
  • Speed line measure the speed of a trend
  • Act as support and resistance lines