Trading Skill #2: Draw Trend Lines

Question 1

How to draw a trend line?

Answer 1

• To get a trend line, just connect your swing pivots and extend the line to the right of your chart
• Trend lines are incredibly versatile as a trading tool:
  . Tells you which direction to trade with
  . Acts as support and resistance
  . Gives a sense of trend momentum

Question 2

What is a trend line channel?

Answer 2

A trend line channel is a tool with 2 essential functions :
. Tracks the current trend
. Sets up expectations of the extent of future price movements and volatility as trend progresses

• Offers a comprehensive view of market price action

Question 3

How to draw a trend line channel?

Answer 3

1. Mark swings
2. Connect swings to form a trend line
3. Project the trend line to create a channel

• Market Swings: observing market swings is the first step to understand price action
• Price swings allow you to follow what is happening in the market and relate them to recent past
• Drawing Trend Lines:
  . Connect the swings to get a trend line
  . To project a bull trend the 2nd swing low must be higher than the 1st
  . To project a bear trend the 2nd swing high must be lower than the 1st
• Projecting Channels:
  . Line is parallel to the trend line
  . Anchor the parallel line to the highest point between the 2 swing lows used to draw trend line
  . The channel line predicts the extent of future price action
  .

Question 4

What are the Trend Line Channel Trading Rules?

Answer 4

• Long Channel Pullback Setup (short=opposite)
  1. Channel must be sloping upwards
  2. Price pulls back down to test bull trend line
  3. Go long with any bullish price formation
  4. Place a target order at the channel trend line
• The best trend line channels have moderate slope/width
• Think twice before trading extremely steep/shallow channels and extremely narrow/wide channels
• Use 45’ line as benchmark
• Use average price bar range for width