| Trading The Trend Lines And Price Channels
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one of two things can happen when a price approaches support or resistance:
the price can break through it, or it can bounce off and reverse direction.
The same is of course true for trend lines.
1. Trading on a Pullback
If a chart is trending in a clear direction, and a trend line can be drawn
connecting a series of relative highs or relative lows, trading
opportunities exist when the price approaches the trend line. If the price
bounces off the trend line and resumes the trend in the original direction,
this can be an excellent opportunity to enter the market in the direction of
the dominant trend. This is often referred to as buying on a pullback in an
up trend or selling into strength in a downtrend.
Buying on a bounce off such a support line can be done through a limit order
just above the support.
2. Trading a Break of the Trend
The second possible trade is the break of the trend line, which can be
traded just as any other broken support or resistance line. If a candle
closes through a trend line to the downside, as in the example below, the
proper entry point would be to sell once the price moves below the low of
the breakthrough candle.
This ensures that the short term force is in the direction of the break
lower. The opposite would be true for a break above a resistance line.
Price Channels:
A trending market can move between parallel support and resistance levels. A
price channel between two parallel lines can often be drawn in a trending
market. The key to a price channel is that the lines be parallel to each
other. The value of the price channel in predicting the ongoing speed of a
trend depends on the lines being parallel.
Unlike trend lines, which can be drawn on any chart with two relative
lows or highs, price channels should not be forced on a chart where they are
not quickly apparent. Once a trend line is established, create a duplicate
parallel line on the chart. Then move it up to the relative highs above or
down to the relative lows below the trend line. If two or more fit with the
line, there may be a valid price channel. Otherwise, the market may simply
be too volatile - even in the midst of a strong trend - to plot a channel.
In the above example the (support) trend line itself is valid, but
creating a parallel line on the opposite side of the prices does not add any
value to the chart and is not warranted by the data. Placing a support or
resistance line where it does not belong will simply provide you with false
signals to buy or sell. |