WHAT IS TREND LINE CHANNEL?

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Here is bearish trend line channel.

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How to draw trend line channel?

For drawing trend line we need to finalize it from 3 points.

Mark swings
Connect swings to form a trend line
Project the trend line to create a channel

STEP #1: MARKING PRICE SWINGS

Observing market swings is the first step for anyone looking to understand price action.

Price swings allow you to follow what is happening in the market and relate them to the recent past.

This chart below marks out the market swings using only price action. You can see how the price action moves like waves.

Once you are comfortable with marking out the price swings, you can move on to the next step – drawing trend lines.

STEP #2: DRAWING TREND LINES

How do you draw a trend line?

Connect the swings to get a trend line. A trend line helps you to make sense of the past (trend).

In the chart above, we connected two swing lows to project an upwards-sloping bull trend line. Note that the second swing low must be higher than the first one.
If we connected two swing highs, we would have ended up with a downward-sloping bear trend line. In this case, a similar criterion applies, and the second swing high must be lower than the first one.

STEP #3: PROJECTING CHANNELS

Finally, we project a line that is parallel to the trend line. With this step, we will get a price channel.

The main thing to note here is the anchor point of the parallel line (also called the channel line).

Anchor the parallel line to the highest point between the two swing lows you used to draw the trend line.

The channel line predicts the extent of future price action. Thus, you can immediately see how it is helpful for profit-taking.

TREND LINE CHANNEL TRADING RULES

After mastering how to draw trend line channels, you can test-drive the trading rules below.

LONG CHANNEL PULLBACK SETUP

Channel must be sloping upwards.
Price pulls back down to test the bull trend line.
Go long with any bullish price formation. (Aggressive entry: buy with a limit order placed just above the trend line)
Place a target order at the channel trend line. (Adjust as necessary)

SHORT CHANNEL PULLBACK SETUP

Channel must be sloping downwards.
Price pulls back up to test the bear trend line.
Go short with any bearish price formation. (Aggressive entry: sell with a limit order placed just below the trend line)
Place a target order at the channel trend line. (Adjust as necessary)

TREND LINE CHANNEL TRADING EXAMPLES

Each of the examples below includes:

An initial channel that tracked the trend and triggered a pullback trade entry.
An adjusted channel that offered a superior exit option for taking profits.

If you are not sure how to adjust channels, take it one step at a time and focus on the initial channel first.

EXAMPLE #1:

These are the swing highs used for projecting the bear channel. The parallel channel line was anchored to the lowest point between the two swing highs.
This test of the bear trend line presented a potential short entry.
The channel line was a potential profit-taking level. But is it the only choice?

If you know how to adjust the channel as the market progresses, the answer is no. There are other options.

The chart below shows the same price action, with the channel that was adjusted after our entry. From it, we get two alternative profit targets.

If you know how to adjust the channel as the market progresses, the answer is no. There are other options.

The chart below shows the same price action, with the channel that was adjusted after our entry. From it, we get two alternative profit targets.

One way to ensure that a trend line is relevant to ongoing price action is to adjust it to accommodate all price action. Hence, as the market pushed down, we pivoted the trend line anti-clockwise to do so.
Accordingly, the anchor for the projected channel line shifted to the new extreme low as well.
The channel line (100% line) served as a conservative target.
For a more ambitious target, the 200% line was perfect in this case. Unless you have strong reasons to believe that the trend will accelerate, it’s usually a good idea to take profits with the 200% line.

To clarify, we obtain the 200% line by projecting a parallel line downwards such that the 100% line is equidistant from the other two lines. Hence, unlike the 100% line, the 200% line does not use a swing pivot as its anchor.

EXAMPLE #2:

We marked both the initial and adjusted channels in the same chart instead of splitting them into separate charts.

We used the aggressive entry method here. A sell limit order led us into a short position as the market rose to test the bear trend line.
This is not a textbook trade with a smooth trip to our target. As you can see, the market struggled to push down and made several attempts to push higher.
Eventually, the market resumed its downwards drift. As it did so, we adjusted the trend line channel (to the one in brown). And we took profits using this new bear channel as a guide.

EXAMPLE #3:

LOSING TRADE

Again, we entered aggressively with a sell limit order at the bear trend line in this example. We could have avoided this losing trade with a conservative entry. (i.e., wait for a bearish formation and enter with a stop order)
We used a Chandelier stop-loss, as pointed out in the chart. Volatility stop-losses like the Chandelier stop are helpful when we do not have a pattern stop to rely on.
The market hit the stop-loss order as it surged up.

This entry was badly timed and resulted in a loss. Let’s accept it.

But there’s something we can learn from the price action that followed.

The chart below shows the subsequent price action with the bear channel adjusted accordingly. It highlights the utility of trend line channels for profit-taking.

Every price action trader has different methods for entering the market. So it’s conceivable that some traders went short within this area. One example is the decision to re-enter after being stopped out.
Even if you did not use the bear channel for entering a trade, as long as you were in a short position, the adjusted trend line channel (brown) offered solid options for profit-taking.