Here’s a chart – the price has wandered along for a while, then taken a sharp journey up before starting on the trip back down.

The green line is an uptrend line – it connects two (or more) lows in market price. In this example, chosen to be a good one, the uptrend line seems to act as a moving support for the price. The price doesn’t drop below the trend line until its rise as a whole has finished.

Similarly, we can have downtrend lines – connecting two or more highs in market price as the price goes down over time. All that applies to uptrends, the same with downtrends, only reversed – for support, read resistance etc.
Here, the downtrend line is in red.

Validation: The rule in technical analysis is that having used two points to draw a trend line, a third, fourth point on the line increases the validity of the trendline (and perhaps the confidence we can have in our analysis).

* Distinction Trend lines are not real – what we’re actually doing is starting to impose a model on the system for the purposes of analysis. We know the price movement may not necessarily obey the model – at some point, it definitely won’t. If the model’s good, we use it – if not, we look for a better model – but for now, nearly all mathematical models of the way a currency moves in a market start with a trend line.

Channels

In largely the same way, a trend can follow a channel – here’s an example.

If a price reaches the bottom of a channel, you might think ‘buy’ – it reaches the top, think about ’sell’. Notice, in this example, the price gets above the channel lines at one point – it soon ducks back in.

Bottom of the channel = support,
Top of the channel = resistance.

And just like trends, there are up channels, down channels – but unlike trends, also level channels exist, 2 horizontal (and imaginary) lines containing the price movements.

We’ve already made a brief mention of two vital concepts in reading forex charts (actually two sides of the same coin), support and resistance.

We’ll look at these in more detail next, with 6. Resistance & Support →