Drawing the Path to Profit: The Art of Trendlines and Channels

The Geometry of Trendlines

In a bull market, connecting the lows of minor waves often forms a straight line—the Uptrend Line. In a bear market, connecting the tops of waves forms the Downtrend Line.

Judging Validity

Not all lines are equal. Criteria include:

Number of touches: The more times prices touch the line without breaking it, the stronger it is.

Length: The longer the line holds, the more significant it is.

Angle: Lines that are too steep are easily broken; a slope of roughly 30 degrees (on semi-log charts) is often more sustainable.

Confirming a Breakout

How do you know the trend is over?

Closing Price Rule: It must be a closing price penetration, not just intraday.

3% Rule: The price should break the line by at least 3%.

Volume: Upward breakouts usually require expanding volume; downward breaks do not necessarily need volume.

Scales Matter

For long-term trends, use Semi-logarithmic Scale charts. They reflect percentage changes, making long-term straight-line trends more meaningful.

FAQ

Q: Should trendlines be drawn using wicks or candle bodies?

A: This is a common debate. The conservative approach uses candle bodies (closing prices), as closing prices better reflect true market consensus. The looser approach uses the highs or lows of wicks. In practice, try both and choose the line that produces more touch points, as it tends to be more reliable.

Q: Is a broken trendline still useful?

A: Yes, a broken trendline still has reference value. According to the role reversal principle, a broken uptrend line may become future resistance, and a broken downtrend line may become future support. Additionally, you can draw a new trendline to adapt to the new market structure.

Q: What is a channel line and how is it used?

A: A channel line is drawn parallel to the trendline on the opposite side of price action. An ascending channel consists of an uptrend line and a parallel upper channel line, with prices typically oscillating between them. Consider taking profits when price reaches the channel line, and adding positions when it touches the trendline.

Q: Why use semi-logarithmic scale for long-term trendlines?

A: On arithmetic (linear) scale charts, a move from $10 to $20 and from $100 to $110 appear as the same distance, even though the former is a 100% gain and the latter only 10%. Semi-logarithmic scale correctly reflects percentage changes, making trendlines far more meaningful for long-term analysis.