Module 3 · Lesson 7 of 13 · Reading price · About 5 minutes
Trends, Trendlines and Channels: How Traders Draw Direction
On this page
Before you read: Chart Patterns Explained: Flags, Triangles, Double Tops
What you will learn
- How an uptrend and a downtrend are described with swing highs and swing lows.
- How a trendline and a channel are drawn, and why two people often draw them differently.
- What it means when a trendline is broken, and what it does not mean.
What is a trend, in chart terms?
If you had to describe the direction of a chart without using the word “up” or “down”, what would you point to?
On a chart, a trend is a description of how swing points line up. An uptrend is a run of higher highs and higher lows. A downtrend is a run of lower highs and lower lows. When neither pattern holds, the market is usually described as ranging or in balance.
This is the same idea as market structure, seen from a distance. A trend on a daily chart can contain several smaller trends in both directions on a five-minute chart. Before calling anything a trend, it helps to say which timeframe you mean.
How is a trendline drawn?
How many points does it take to draw a line, and how many does it take to trust one?
A trendline joins two or more swing points with a straight line:
- In an uptrend, the line usually joins swing lows and sits under price.
- In a downtrend, it usually joins swing highs and sits above price.
Two points define a line. A third point that touches the line is often called a confirmation, but that is a description of the past, not evidence that a fourth touch will come.
Drawing choices change the line. Some traders use candle wicks, others use candle bodies or closes. Some use a linear price scale, others a logarithmic one, which makes the same percentage move look the same size anywhere on the chart. Over long periods the two scales can put a line in very different places. None of these choices is the correct one; what matters is that you know which one you used and apply it consistently.
Trend and channel diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional uptrend. A trendline joins three rising swing lows, and a parallel line through the swing highs forms a channel. The final move crosses below the trendline, and the labels list the different things that could follow. It is constructed for teaching and is not real market data.
Try it on a chart
- Choose the trendline tool on the left and join two swing lows.
- Look at where the later bars sit compared with your line.
Charts and quotes are TradingView's data, not ours, and may be delayed.
What is a channel?
If price has respected one line, is there a second line it seems to respect on the other side?
A channel adds a second line parallel to the trendline, drawn through the swing points on the other side of price. In an uptrend, the lower line joins the lows and the upper line is drawn parallel through the highs. The result is a band that describes how far price has typically swung within the trend.
Some charting platforms draw a regression channel instead: a line fitted through a chosen price, such as the close, between two anchor points, with bands set a chosen number of standard deviations away. A regression channel is calculated, so everyone using the same settings gets the same lines. A hand-drawn channel depends on the person drawing it.
What happens when a trendline breaks?
When price closes on the other side of a line, what has actually changed?
When price crosses a trendline, the only certain fact is that the recent pace of the trend has changed. Price might:
- reverse into a trend in the other direction;
- move sideways into a range;
- continue in the same direction at a gentler angle, which needs a new, flatter line;
- cross back to the original side, which is often called a false break.
Because a line can be redrawn after almost any break, trendlines are easy to fit to the past and hard to use consistently. A useful habit is to write down, before the break, what you would expect to see if the trend were ending and what you would expect if it were only slowing.
What this does not tell you about trends
- A trend describes what has already happened. It does not say how long the trend will last.
- Trendlines are subjective. Two careful people can draw different lines on the same chart, and both can be reasonable.
- A touch of a line is not a reason to trade, and a break is not a signal. Nothing here suggests when to buy or sell.
- Lines drawn on a chart do not create support or resistance on their own; they summarize where trading happened before.
Method in Practice: a break plan, and the redraw problem
Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.
Try it on a real chart. Look at the chart in this lesson, then test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.
The idea. Two careful people can draw different trendlines on the same chart (this lesson). John fixes how he draws his line and draws it before the session. During the session he doesn't redraw it. The no-trade replay shows the line he could have drawn instead.
John's plan
- Setup
- a down trendline through the two most recent 30-minute swing highs at least 5 bars apart, drawn before 08:30
- Enter if
- a 30-minute period closes at least 0.10 above the line's value at that time. Buy.
- Wrong if
- a 30-minute period closes back below the line
- Manage
- take half at entry + 0.50, the rest at entry + 1.00 or by 14:30
- Risk
- $150 maximum, costs included
Three outcomes
-
Worked: a clean break → +$140
-
Failed: a break, then back below the line → −$76, inside the limit
-
No trade: a different line would have shown a break. John's line didn't → $0
Show the full replays
| Item | Plan |
|---|---|
| Line | Through the two most recent 30-minute swing highs at least 5 bars apart, drawn before 08:30. Not redrawn |
| Entry condition | A 30-minute period closes at least 0.10 above the line's value. Buy 2 at market after that close |
| Wrong if | A 30-minute period closes below the line's value. Exit at market after that close |
| Management | Half at entry + 0.50 (limit), exit for the rest to entry (stop), rest at entry + 1.00 (limit). Time limit 14:30 CT |
| Risk cap and size | $150. 2 contracts while the line is within 0.40 of the entry |
| Not trading if | Scheduled major release within the hour, or no setup by 12:00 CT |
Replay A: worked
| Time (CT) | What happened | John |
|---|---|---|
| 09:30–10:00 | Line at 100.40. Closes 100.58 | Buys 2 at market, filled 100.63 |
| 10:00–11:20 | Trades 101.13 | Sells 1 (limit). Exit for the other moves to 100.63 |
| 11:20–13:30 | Never back to 100.63, trades 101.63 | Sells the last 1 (limit) |
Result after costs: +0.50 point = +$50, +1.00 point = +$100, commissions −$10. Net +$140.
Replay B: failed
| Time (CT) | What happened | John |
|---|---|---|
| 10:00–10:30 | Line at 100.30. Closes 100.45 | Buys 2 at market, filled 100.50 |
| 10:30–11:00 | Line at 100.27. Closes 100.22 | Wrong-if met: sells 2 at market, filled 100.17 |
Result after costs: 2 × −0.33 point = −$66, commissions −$10. Net −$76.
Replay C: no trade
| Time (CT) | What happened | John |
|---|---|---|
| Before 08:30 | John's line (highs 5+ bars apart) is at 100.90 at 10:00 | Drawn and fixed |
| 10:00–10:30 | Closes 100.70. A line through two closer highs would be at 100.50, so that line shows a "break" | John's line: no break. No trade |
| 10:30–12:00 | Rises to 101.10 | Watches only |
Result: $0. Journal: "In hindsight the other line looks right. I didn't draw it before the session, so it doesn't count."
Test it yourself
- Write the drawing rule (which swings, how far apart) and draw lines before each test session.
- Never redraw during the session you're testing.
- Ask someone else to draw lines on the same charts. Compare.
Where it breaks
- Lines are subjective, and hindsight draws better lines.
- A touch or a break isn't a reason by itself.
- A sloped line's value changes every bar, so "the level" keeps moving.
Calculators: position sizerisk/rewardexpectancy
Reflection question: When did you draw the lines on your chart: before or after the move?
Check yourself
- Which swing points does an uptrend trendline usually join? Hint: the ones under price.
- Name two drawing choices that can move a trendline. Hint: wicks or bodies, and the price scale.
- Price crosses below a rising trendline. List three things that could happen next. Hint: reverse, range or continue more slowly.
Reflect on your own process
- Does your written plan say whether you anchor trendlines on wicks or closes, and on a linear or log scale?
- Before a trendline is crossed, what do you write in your journal about what would mean slowing versus ending?
- How often do you redraw a line after a break, and do you record the original line before changing it?
- When did you draw the lines on your chart: before or after the move?