Channel line and trend line
Spread 0. When the price overshoots the trend channel line and reverses, it makes up for a good point to fade the trend bet against it because it shows the trend has accelerated too fast.
A reversal from a second consecutive overshoot is even more reliable. There are several ways for a trend channel line to be plotted.
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First, you can duplicate the trend line and carry it over to the other side of the price action. Second, you can draw it on the other side of the price action with no regard to the trend line by connecting at least two price extremes.
Third, you can use the best-fit technique we mentioned in an earlier article.
Different traders methodics in drawing trend lines vary but you should at least aim at placing your trend channel line in such a way, that it contains the opposite price extremes in the interval of those that were used to draw the trend line. Weve said earlier that you should use at least three price swings for the trend line and at least two for the trend channel line.
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This means that in an uptrend, you will need at least three lows and two highs. Therefore, in theory, the trend channel line should be connecting at least two highs which are within the interval of price movement between the three lows.
Here is an example.
The first step is to learn how to identify channels. Key Takeaways Trading channels can be drawn on charts to help see uptrends and downtrends in a stock, commodity, ETF, or forex pair. Traders also use channels to identify potential buy and sell points, as well as set price targets and stop-loss points. Ascending channels angle up during uptrends and descending channels slope downward in downtrends.
Sometimes there might be a single swing that distinctively exceeds the rest and doesnt fit the tighter channel. This should usually just be ignored, but keep in mind that in some cases the market might later form new extremes at relatively the same level, meaning that you should switch to using that new trend channel line.
Reversals are imminent Generally, each channel that is sloping up should be seen as a wedgeeven if it is not that apparent when it is made of two parallel lines, instead of channel line and trend line onestherefore it is almost imminent that the price will break through the bottom of the channel the trend line in an uptrend, and vice versa.
After the breakout, the price can either reverse and enter a bearish trend, or the market can go sideways.
In some cases, the price might not break through the bottom of the channel, but rather accelerate very fast and break through the trend channel line, marking a very distinctive price rally, which can end in one of the same two scenarios — trend reversal or trading range. Logically, this is true for downtrends as well. On the following example you can see an ascending channel, whose trend channel line was penetrated by a buy climax, after which the market entered a trading range.
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Trend channel line overshoots channel line and trend line closely related to wedges. In most wedge formations you can see that failed breakouts through the trend channel line have triggered a reversal and most trend channel line overshoots and reversals are wedge reversals. Predictable or not?
You might ask a question then, if reversals after a trend channel line overshoot are so common and everyone knows about them, why do they keep occurring. The answer is simple — inexperienced traders.
Understanding Trend Lines and Channels Understanding Trend Lines and Channels Christopher Lewis on May 06, Updated On May 06, By: Christopher Lewis While support and resistance is most often found at round whole numbers, there is also another form of both in the shape of what is known as a trend line. If a support level is a horizontal line, and therefore horizontal support, then a trend line should be thought of as vertical or angular support. Needless to say, this works for both support and resistance like the horizontal levels that traders use. In fact, the similarities are many and the tools are used the same way in many aspects.
By default, newbie traders on the wrong side of the trade abstain from cutting their losses short and hold their positions longer, hoping the market may reverse in their favor, up to the point they cant withstand any more losses.
As all of them suddenly exit their positions at once, this causes the overshoot.