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This video introduces you to the use of Trend channels in technical analysis.
This is the sixth video to start learning basic technical analysis techniques.
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Hello this is Sylvain Vervoort with your part 6 technical analysis tutorial. In this part we will have a look at how price moves within a channel and how channels can be used as price targets and time targets. If you like this video, pay a visit to my website at stocata dot org. The final purpose of this video series is to teach you how to trade successfully applying technical analysis techniques.
Trend channels are parallel lines containing a smaller or larger price move. I also consider the unparallel lines of a triangle formation as a trend channel. Trend channels represent support and resistance and can be used to find price targets. In this chart of CRM you can see an uptrend line with a parallel line to form a medium term trend channel. The last day on the chart, price falls out of the channel. What you can do now is start drawing a new downtrend line. You would consider having a new downtrend as long as the closing price stays below this line.
Three days later you can see a number of things as the result of a new pivot point. The original downtrend line, the thick blue line on this chart, does not seem to fit to create a longer term downtrend channel. This is most probably normal. Remember when we talked in the learning video about trend lines, that most of the time it is difficult to draw a new trend line when at a bottom or top there are big high volatility bars, a lot of the time showing sharp V-patterns. This seems to be the case here at the top. So you can use a next or previous bar to start the longer term trend. Here it is touching 3 bar highs already, which is a good sign. Next you can now draw a parallel line through the last pivot low point to create the longer term light blue down channel. Looking for a smaller channel within this bigger channel, we can draw an inverse trend line between the last two low points and a parallel line through the last high point. That way you have a smaller, faster moving, and shorter term downtrend channel within the long term channel. You now also have a first estimate as to where price can go and within which period. Here it is the down moving red triangle with a target price between $17 and $16 in a period of about maximum 15 days.
Three weeks later price breaks through the shorter term red channel. In the mean time we also moved the lower side of the long term blue channel a fraction lower to the new lowest point. What you see now is that the long term channel can be slightly extended using the original top and bottom at the start of the channel. You draw here the blue dashed lines. So, what do you expect now? Price moving up to the upper side of the blue long term channel or? You can see that the green short term downtrend line, starting from a window and touching two more price highs is a resistance level that is not yet broken. So, it is wise to consider that price may stay low a bit longer until this short term trend line is broken.
Three days later, price does not break the green downtrend line and drops with a window to the lower side of the extended long term downward channel, also reaching the lower side of a new small green channel. Would you consider this a buying point? Yes, you can at least if you are a swing trader and keeping in mind that the price target is limited to the upper side of the long term downtrend channel. But you should say no, if you are a long term trader, because price is moving within a long term downtrend channel.
Price actually moves up and now touches a resistance level. At the same time price is close to the upper side of the long term downward channel and is close to the upper side of a new short term upward channel. This would be the right moment for the swing trader to close his long position and for both the swing trader and the long term trader to enter a short position. You basically would keep a stop loss setting at the upper side of the extended long term downward channel. Note that generally the long term trader would use a weekly or even a monthly chart to decide on his trades.
It was clearly a good start for the short position and reaching the lower side of the long term trend channel or breaking out of the short term downtrend channel now, offers a very nice profit for the swing trader. The long term trader expecting a long term down move would normally stay in the position as long as the long term down channel is not be broken to the upper side. The short term downward channel was drawn based on the inverse trend line and a parallel line through the last top. Note how the two first high prices at the top are nicely in line with the downtrend inclination! As a swing trader you would go for another long position now.
Price first consolidated a little bit and made a new low a fraction below the previous one. Price then started moving up and a few days later you would draw an uptrend line after a first reaction point. A parallel line creates another smaller uptrend channel within the larger long term downtrend channel. When price reaches the upper side of the long term channel, it is again time for the swing trader to close his long position with another nice profit and to open a new short position.
Price moves down, but holds above the window support and a previous pivot point, and now breaks out of the short term downward channel. Since price is not making a new lower low within this short term down channel, there is a fair chance that the long term downtrend is coming to an end. As a swing trader, you would close your short position now. You can open a new long position with a stop at the last pivot point. This gives you a good risk-to-reward ratio.
Price moves up and breaks the long term extended downward channel. That would be a buying signal for the long term investor, with a stop at the last low pivot point. Price then makes a short term reaction and falls back to the last support level but without breaking that support with a closing price. From this point price starts moving up and about 3 weeks later you can draw a new uptrend line. Parallel lines projected to a previous and a following top creates a new long term uptrend channel. If you look at the further evolution of the CRM stock, you will notice that price continued to move up to about $40 within the long term uptrend channel.
I hope I have convinced you of the practical use of long term trend channels and short term trend channels within the long term ones. They will provide good information as to where and in which time period price will move to a certain level. So, that’s it concerning this learning video about trend channels. I hope you enjoyed it. Watch out for more. Stay in touch, subscribe to my channel, tell your friends and pay a visit to my website: stocata dot org. Have a nice day and I will see you in my next learning video.
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