A trend is a run of swings moving in one direction. In an uptrend each swing high and each swing low is above the one before; in a downtrend each is below. Trendlines and channels make that structure visible and show where pullbacks may stop. The swings themselves tell you when the trend has ended.
What you will learn
- How to label a trend from its swing highs and swing lows
- A repeatable way to draw a trendline, and how to work out where it will be later
- How to add a channel line and use it for targets
- The order of warning signs that shows a trend has ended
Read the trend from swing points
You met swing highs and swing lows in the support and resistance lesson. Label each one in turn and compare it with the last of its kind.
- Higher highs and higher lows: an uptrend.
- Lower highs and lower lows: a downtrend.
- Anything else, such as equal highs with higher lows, or a mix: a range, or a trend that is changing.
Take these swings on a four-hour EUR/USD chart, in order: low 1.0800, high 1.0880, low 1.0840, high 1.0910, low 1.0870, high 1.0935. The highs rise (1.0880, 1.0910, 1.0935) and so do the lows (1.0800, 1.0840, 1.0870), so this is an uptrend.
Look at the size of the gains as well. The highs climbed 30 pips and then 25 pips. The lows climbed 40 pips and then 30. Each push is a little smaller than the last. The trend is intact, but that shrinkage is the first hint that it is slowing.
Which timeframe should you use? Draw trends on the timeframe you trade from and on the one above it. A trend on the daily chart can contain a pullback that looks like a downtrend on the 15-minute chart. Lesson 8 shows how to combine the two.
Draw a trendline step by step
- In an uptrend, find two swing lows. In a downtrend, use two swing highs.
- Join them with a straight line and extend it to the right.
- Choose wicks or candle bodies and use the same choice on every chart, so your lines are comparable.
- Treat the line as tested once a third swing touches it and holds.
- If you have to cut through several candle bodies to make a line fit, there is no line. Leave it off.
Number the four-hour candles from the first low. The 1.0800 low is candle 0 and the 1.0840 low is candle 20, 80 hours later.
- Rise: 1.0840 minus 1.0800 is 40 pips.
- Slope: 40 pips over 20 candles is 2 pips per candle.
- Projection: at candle 35, the line sits at 1.0840 plus 15 candles times 2 pips, which is 1.0870.
The third swing low formed at candle 35 at exactly 1.0870. With three touches, it is a line other traders are likely watching as well.
Steep lines break sooner. A line rising 2 pips per candle is easy for price to keep up with. A line rising 10 pips per candle needs the trend to keep accelerating, and few trends do.
Add a channel
A channel is a second line, parallel to the trendline, drawn through the swing high between the two lows. It marks where rallies have tended to stall.
- The 1.0880 high formed at candle 10. The trendline at candle 10 was 1.0800 plus 10 times 2 pips, which is 1.0820.
- The gap between them is 60 pips, so the channel line runs 60 pips above the trendline.
- At candle 25 the trendline was at 1.0850, putting the channel line at 1.0910. The high that formed there was 1.0910, a clean touch.
A trader can buy near the lower line and set the target near the upper line. A channel also shows weakness. The next high, at candle 45, reached 1.0935, but the channel line was at 1.0950 by then. Price fell 15 pips short of the top of the channel, which fits with the shrinking swings you saw earlier.
When a trend ends
Trends rarely reverse in a single candle. Watch for warning signs, which tend to come in this order:
- Smaller swings, or rallies that fall short of the channel line.
- A close through the trendline.
- A lower high in an uptrend, or a higher low in a downtrend.
- A close beyond the last swing low in an uptrend, or the last swing high in a downtrend. This last step is often called a break of structure.
Follow the example through. After the 1.0935 high, price closes at 1.0890 at candle 50, below the trendline, which had reached 1.0900. It finds a low at 1.0885 and rallies to 1.0920, a lower high than 1.0935. Then it closes below 1.0885. Now there is a lower high and a lower low: the uptrend's structure has broken.
The trendline broke first, but on its own that only told you the trend had slowed. Plenty of trendline breaks lead to a flatter trend or a sideways range instead of a reversal. The lower high and the lower low showed sellers taking control. Lesson 6 shows how momentum indicators can warn you even earlier.
Check your understanding
Swing highs come in at 1.2650, 1.2690 and 1.2685, and swing lows at 1.2600, 1.2630 and 1.2640. Is this still an uptrend?
Not clearly. The lows are still rising, but the last high (1.2685) is below the one before it (1.2690). Equal or lower highs with higher lows suggest the trend is stalling, and price may be forming a triangle, which lesson 4 covers.
A trendline joins a low of 1.3000 at candle 0 and a low of 1.3030 at candle 10. Where is it at candle 25?
The slope is 30 pips over 10 candles, or 3 pips per candle. At candle 25 the line sits at 1.3000 plus 25 times 3 pips, which is 1.3075.
Price closes below your uptrend line. Has the trend reversed?
Not yet. A trendline break shows the trend has slowed. A reversal needs a lower high followed by a close below the last swing low.
Key points
- An uptrend makes higher highs and higher lows; a downtrend makes lower highs and lower lows.
- Draw trendlines through at least two swings, use wicks or bodies consistently, and trust the line more after a third touch.
- Work out the slope per candle so you can project where the line will be.
- A channel line through the swing high gives a target zone and shows when rallies start to fall short.
- A trendline break is a warning. A lower high and then a lower low show the trend has ended.
Next lesson: Recognise chart patterns and measure their targets
All trading is simulated. Rewards are based on performance and are not guaranteed.