Let's analyze a specific case using XRP. I will show 2 options for constructing channels and we will discuss which is better.
Why do we need this?
To understand the boundaries of price movement in the near future. To not miss a breakout. Having a trend channel allows you to trade more safely even in a downtrend. Recently, I showed a trend channel for BTC - the price was in it from January to April (very good for trading).
Where to start?
To draw a trend line, you must first ensure that this trend exists. In a downtrend, we should have:
- each subsequent peak is lower than the previous one
And
- each subsequent minimum is lower than the previous one.
Something like this👇
Drawing a trend channel
If there is a trend, connect the first peak with the next peak. To get a return line, connect the minimum with the next minimum.
Here is the first rule: The trend line and return line are strictly parallel. If they are not, then something is drawn incorrectly.
Trend channel for XRP - option 1
Unfortunately, real charts are not as perfect as in theory. Here is an example:
I connected the first peak with the second and got a pretty decent line. It would have completely satisfied me until 15.03.
Then the final breakout happened, and the trend line turned from support into resistance. It seems like everything follows the rules.
So what do we have after 15.03 - a new trend? I couldn't draw an adequate trend channel for it🤷🏻♀️
Now is the right time to remember that our trend line is an inclined resistance. Support/resistance lines are best drawn starting from higher timeframes.
Let's go to the weekly: that's right, it's some junk, not a trend channel 😂 🙈
Draw on the weekly. Here’s what came out:
Now let's check what we got on the daily timeframe:
It turned out quite decent. I am satisfied with this trend channel 😊
Main rules for construction:
1. Make sure that the trend exists (decreasing peaks + minimums).
2. Draw on the daily chart, check on the weekly chart.
3. The trend line and return line must be parallel
4. The trend line and return line should have many touches with the price
What do you think? Did I draw it correctly? Write your forecast on where the price will go?