It is important when you are going into a trade you are able to identify trends such as price movement. It should be apparent to you by now if you are doing any trading whatsoever that markets do not move in straight lines. There is always going to be peaks and troughs. This is important because it allows you to see whether we are trending up, trending down or in a range.
When prices are creating higher successive peaks and higher successive bottoms this is known as trending up.
When lower peak after lower peak is being formed with lower troughs this is known as trending down.
When prices cause constant sideways movements that creates horizontal peaks and troughs that is known as range.
When identifying the trends of the coin or market we use trend lines.
On a downtrend a line is drawn connecting as many peaks to the line as possible. You can see the red line below is drawn connecting the four different peaks in a downtrend.
Here is an example of how it would appear on a chart.
When we are seeing an uptrend we draw a straight line that connects all the troughs. The troughs are on the underside of the line. Below, you can see the different points connected to the red uptrend line.
See the example below of how an uptrend would look on an actual chart.
Prices trend between two parallel lines. The upper line of the channel is known as the channel line and the bottom line is known as the trend line. The longer the channel continues on then the more it is tested and reliable that it becomes.
Linear Regression Channel
The next channel we will look at is known as a linear regression channel. A linear regression channel consists of three parts:
- Linear Regression Line: This is a line that best fits all the data points of interest.
- Upper Channel Line: The upper channel line runs parallel on the top of the Linear Regression Line.
- Lower Channel Line: The lower channel line runs parallel on the lower side of the Linear Regression Line.
The longer the channel line continues the stronger the trend. Below is an example of a downtrend linear regression channel.
Below is an example of an uptrend linear regression channel.
Hope these basics help and we look forward to your comments!