We have now understood what the candlestick chart actually means? We also came through some strategies to use moving average on the candlestick chart. Now we are going to learn the drawing the trend channel. How to draw a trend channel? Let's continue in our journey of technical analysis, share market and the stock market.
What is a trend channel?
Before drawing the trend channel we must know what is a trend channel? We will keep it very simple. The trend channel can be called a path in which the prices move. Or we can say that the behavior of prices in a manner, following a particular zone which we define. That zone can help us in earning profits. we will learn it in the later part. Now we shall learn to draw the trend channel.
Drawing a trend channel
1)To draw a trend channel you first have to select the lowest points which you can consider to draw a line. A must remember thing is, we should not draw any line forcefully. If there is a possibility of a line then only we should try. Okay. Let's continue. See the image on the left side.
2)Now come to the upper side where we are going to follow the same process. Mark some points which you feel can be upper points. Take reference to images.
3) After finding all the points from the downside, join all the points with a line carefully. Don’t expect an ideal form of a line joining all the points, just draw a line going through most of the points. Draw a line going through most of the points from the lower side and upper side both. Ignore some points going below or above the line. When your line is complete, we are ready with a rough framework of the trend channel.
Look at the picture below to get an idea.
The lower line of the channel will be called support and the upper line will be called resistance. It will not be perfect to say it support or resistance but just to understand.
Keep these things in mind
1. Most of the times trend channels will not be ideal or perfect.
2. Sometimes candles may cross channel
3. Only practicing these on the charts will make you more precise or improve.
4. See many charts and understand the happenings in the trend channel.
5. Many people use it for short-term trades e.g. swing trade.
6. If the trend channel is longer, its possibility of following the same trend channel increases.
7. Give yourself some liberty to adjust the trend channel according to your convenience because you cant expect it to be ideal every time.
Using trend channel for trading
There are many strategies and even you can use your new strategy. Some are given here. But we must consider some basic points before looking towards these strategies.
Most of the times trend channels will not be ideal or perfect.
Only practicing these on the charts will make you more precise or improve.
If the trend channel is longer, its possibility of following the same trend channel increases.
sometimes we will fail, so stop loss is very important.
Even loss can happen if we go wrong.
Strategies of following a trend channel
In this also we can have many strategies. But we will take 2 very simple to understand strategies.
First strategy-
The first strategy is very simple. In this, the buying will be considered at the lower trend line of the channel and the selling can take place when the price touches the upper line. It seems very simple but it's not that simple. This is short-term in nature. Look at the image to understand.
Problems
Many a time, The price will not touch the lower trendline or upper trendline.
Sometimes it will take lesser days sometimes more
If it takes more time to reach the upper line, your money can be stacked
Some more problems are there but the practice will make you improved
Second strategy-
This strategy only works when the channel is in an upward direction. The buying can be considered when the price touches the lower line. It is different than the first because it does not consider selling when the price touches the upper trend line. In this strategy, we will wait for the price to again touch the lower trendline. As it again touches the lower trendline, more buying will take place. This will keep happening again and again. The number of buys on the lower line differs from trader to trader. According to me, 3-5 times is okay to consider buying on the lower trend line. Let's assume, we have completed buying 5 times, Now when the price touches the upper line, we can consider selling all the positions. We can consider selling everything and we will end up making profits (not always). Look at the image below to understand.
Strategy after breakout-
When the price is following a certain path or the channel, we will not buy or sell in this strategy. When the share price crosses or breaks the channel from the upper side, we will consider buying. Again how much to buy, depends upon the trader. From this point, there are thousands of strategies. I will just tell you a very simple strategy. Consider a target to achieve e.g. 10%,20% profit which should be feasible and realistic. When your target is reached, sell everything and end up making profits(not always). Its a very basic strategy. Again, only practice will make you improve.
Consider the following points to make the strategy better to implement.
If the trend channel is longer, its possibility of price moving upwards after the breakout is more.
Check the size of the candle on the breakout. The bigger candle means bigger confirmation
Check the volume, The bigger volume means bigger confirmation
Follow stop loss.
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