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Everything You Need to Know To Trade A Trend Line Strategy
Updated: August 9, 2020
Drawing key levels is a core part of technical analysis.
The problem is the technique can be so confusing to newbies, because marking a them on a chart is very subjective!
It is mainly due to the amount of conflicting information out there, traders get really frustrated with getting the process right.
If you give two traders the same chart, and ask them to each plot a line – you will probably see two very different results.
In this guide, I am going to show you my way of drawing a trend line, and give you a demonstration on how I use them.
What Are Trend Lines Really Used For in Technical Analysis?
These guys are going to pop up in all your ‘chart analysis 101’ text book material.
Their basic function is to highlight linear support and resistance.
Quite often when the market is on the move (making new swing highs and lows), price will tend to respect a linear level – which we identity as a trend line.
Bullish markets will tend to create a rising linear support level…
Notice how all the counter trend movements are terminating at this structure?
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When they appear, we can use these lines to anticipate the next reversal point in the market, and look for bullish reversal signals there.
The opposite is true for a bearish scenario…
So obviously the bearish situation is just a role reversal .
Counter trend rallies terminate at clear line as it they as a linear resistance level. We can use it as an anticipate reversal point.
Therefore this common type of technical analysis involves inperpreting these lines as linear support and resistance.
When a line is broken, the market often can come back and re-test it as a new support or resistance level.
Above: An example of one which once held as resistance is then respected as new support as the market pulls back down, and re-tests it.
What I’ve shown so far is the basic functions, but we can do a lot more with them. In the rest of the article, we will walk you through other trend line events such as…
- Counter-trend breaks (flags)
- Classic breakouts
- Example of reversal signals at linear structures
- Consolidation structures created (good and bad)
How Do You Draw Trend Lines – The RIGHT Way?
Firstly, we need to cover a consistent rule-set to encourage (what I believe), is the correct way of identifying quality levels .
Most of the re hashed tutorials out there just instruct you to mark two swing highs or lows together… only two.
This is really crude advice, and can leave you the trader very confused to where to draw the damn line. Tips such as these set traders on the path to extreme over analysis.
Following the commonly preached text bool method (of only using two anchor points), opens up the door for hundreds of possibilities on one chart!
You don’t want that, you need better quality control… other wise you may end up with charts like this…
I know this is an extreme, and humorous example – but I think this guy has connected every two swing highs and lows together…
A line with only two anchor points really just an ‘unconfirmed’ level on your charts.
The example above shows a trend line marked with two swing lows as the anchor points. It is an aggressive, low quality way to go about it.
It is only really a catalyst which may turn into proper level – but at this stage it is just a pending line.
You can mark these pending lines if you think it is appropriate, and wait to see the line is respected again – but most of the time it is just going to clutter your charts, and skew your technical analysis.
The ‘trick’ to drawing quality lines is to use *3* clear anchor points… then you’ve got something worth occupying the real estate of your chart!
When I say anchor points, I mean swing lows or highs that line up in an obvious linear fashion.
See in the chart above, we used 3 swing points.
Using a minimum of 3 anchor points, we build a quality trend line that actually matters to technical analysis.
When you just use two anchor points, your level is basically ‘unclear’, or only partially constructed. You never know if you have it marked in the correct place.
The series of charts below will illustrate the frustration of someone who only uses 2 anchor points…
Seems legit, until…
All of a sudden the market doesn’t respond as expect… better ‘adjust it’, yeah?
OK, now I think I’ve got it…
The comic shows the trader ‘chasing the line’. Which is frustrating and unproductive analysis.
Don’t waste your energy… use 3 anchor points. It’s much easier, and provides a confirmed trend line in the market.
Don’t chase price, mark what you can clearly see!
Above: Using 3 swing highs rule. No more chasing our tail, three data points line up – we’ve got what we need.
Above: The more anchor points we have to build the line, the better – it just becomes more obvious and makes the trend line more significant!
Don’t Let Fake Outs Throw You Off
One thing that throws a lot of traders off, are false breakouts.
We won’t always get the perfect text-book scenario for our charting, false breaks do occur often – making a mess of our picture perfect idea of a trend line.
To ‘filter out’ the fake-outs, I use something which I call the common denominator approach .
The goal is to line up the common data points that create some obvious consistency, and just ‘makes sense’. Let me show an example…
Above: We’ve drawn the line that conforms well with the lows here in a consistent manner. We cut through the fake outs by basically ‘connecting the common dots’.
We can see how the level holds as support here well – the fake out creates an inconvenience we need just to slice straight through.
Let’s look at a bearish example…
Lining up the common swing highs here for identification. The fake out becomes obvious when you work with the consistency of the market .
Marking these out isn’t an exact science, you’re just looking to mark out the general structure so you know when price approaches this important technical level.
Keep the process simple and obvious. If it isn’t obvious and you really struggle to line up the level – then it is probably not a structure level worth worrying about.
Trend Line Reversal Trade Opportunities
Because we know they are anticipated to act as reversal points, we can target reversal trading signals here.
We use candlestick reversal patterns a lot for our trade setups, so we heavily focus on those.
Here is a bullish market example with some candlestick reversal signals…
We had a clear obvious structure here, which was holding nicely as a linear support.
It is only logical to target it for buying opportunities via bullish reversal patterns.
This chart had a bullish outside candle, and a bullish rejection candle (both reversal signals), form off off the level, communicating to us that the the trend line once again was holding as support.
Both trade setups worked out nicely
Check out the chart below…
Above is a nice bearish example, acting as resistance which did see a nice bearish reversal candlestick signal form off it.
The bearish rejection candle signals it was still being respected as resistance, and that we should expect lower prices to follow.
The setup produced a nice sell off!
It is just really simple, logical thinking – just the way I like my trade ideas.
You’ve got a linear line structure where you know price is expected to reverse. Simply combine that with a reversal signal to form your trade opportunity.
Trend Line Breakouts!
We know so far these are key market structures with strong supportive and resistive properties. Whenever some form of market structure is broken, a violent breakout can occur.
A common strategy is to catch breakouts in trend line trading.
There are many ways to do this, but I prefer the ‘close confirmation’ method.
I recommend you wait for for a candle to break through, and close on the other side of the line before reading the situation as a breakout.
The reason for this is because price can often pierce through the line, but not close beyond it. These are known classically as ‘fake outs’, and are notorious around important structures.
Many traders get cremated by fake out events, because they are too ‘trigger sensitive’ and slam the buy, or sell button at the first sign of any kind of sign the market is breaking out.
So we can see price breaking through the line here. Many breakout traders would jump on board this, mostly fueled by greed to try catch the breakout early… but this can come at an expensive cost.
The main point here is the candle hasn’t actually closed yet…
In the chart above – when the candle does finally close, it closes back under – revealing a breakout trap!
Those who were too quick to act have been ushered into a bad position. Now their money has been taken by the market, and flows into the pockets of more disciplined traders.
It is very common for trend lines to be temporarily broken by price, even by just a few pips – only to turn around in the opposite direction.
That’s why trading an ‘in the moment’ breakout is a risky strategy.
When you focus on the candle close, your chances improve of catching a true breakout.
We can see if the pic above, the candle actually closed above the level, indicating a breakout is underway…
The market actually followed through with the breakout move!
This is a good example of waiting for the candle closes gives a much better read on the situation. Trading candles ‘on the fly’ is simply a dangerous game.
Channels are best described as two linear levels that run in parallel to one another.
They look like and sometime are referred to as ‘railway tracks’.
You can get rising, and falling channels.
A rising channel is made from linear higher highs, and higher lows.
The two lines running in parallel create the support, and resistance of the channel structure. Like a ranging market, price bounces between these two lines and reversal signals can be picked off here.
The downward channel is made from two parallel descending lines, which line up lower highs and lower lows.
Reversal signals can be targeted at the channel boundaries. We can see in the pick above that there were some reversal signals at the channel resistance.
They signaled continuation of the channel and were good trade opportunities.
Price Squeeze Consolidation Structures
Linear levels can be used to highlight a consolidation pattern that I call a price squeeze.
It is a scenario where you get lower highs, and higher lows converge in on one another… creating a ‘squeeze’ scenario.
Notice how the higher lows and lower highs created two linear support and resistance levels that converge in on one another.
This ‘compression’ of price is a strong catalyst for a breakout. Generally when the market breaks, and closes outside the squeeze pattern – you get very strong moves.
The above shows the bullish and bearish pressure tightening price into a squeeze, then forcing a breakout.
These patterns can breakout upwards, or downwards, so be prepared!
Watch Out for the Megaphone Pattern!
This pattern is the opposite of a squeeze pattern.
The megaphone is an expansion pattern which can be identified by two diverging lines .
Stock traders know this pattern as the ‘broadening top’, and it shows that the market is increasing in volatility – in an unstable kind of way.
Megaphone patterns are usually created by a market phase called distribution – where big traders are dumping their positions, and violent up and down swings occur.
You will see this pattern on your charts when the market creates higher highs AND lower lows.
Notice how the swings keep becoming larger apart as more and more volatility stacks into the market.
Flag Patterns (Counter Momentum Trend Lines)
The flag pattern is created mainly in a trending environment.
Flags appear when a counter-trend line forms against the prevailing trend momentum. The opposing trend line acts like a dam, holding back the main pressure…
Above: See how the counter trend line backs up the trend pressure. It is the flag break you’re looking for here – a good trend continuation signal.
Flags really work the best in a clear trending environment, and show up more regularly on time frames like the h4 – h8 charts.
Above: Demonstrating the ‘dam wall’ effect here on a bullish market. The upward momentum encounters resistance in the form of a counter momentum line. Once the dam breaks, boom!
Alerts With My MT4 Battle Station
The battle station is my an MT4 tool I made for those who are into price action trading, especially traders who use candlestick patterns, or Renko charts.
I have a ‘trend line’ filter added into the program that will basically alert you to any reversal patterns that form off any levels that you’ve drawn on your chart .
This can be useful if you’re waiting specially for a signal to form off technical points you’ve drawn on your chart…
Above: I set the battle station to only be concern with reversal patterns it detects off levels I’ve drawn on the chart. Notice how it has highlights some reversal patterns at the levels by drawing the tan line through them (colors can be customized)
The battle station can be extra useful here as it will also alert you when it finds these patterns off your t- line.
The alerts come in 3 different ways so you don’t miss a trade:
- Smart Phone Notification
- Email Alerts
- Metatrader Internal Program Pop-up Alerts
More information on the Battle Station: trend line alerts.
Take Home Points From This Lesson
- Trend line analysis can be very subjective – don’t fall into the over analysis trap
- They act as linear support and resistance levels in the market
- Use the 3 anchor points strategy to make sure you only draw quality lines
- Use the common denominator method to ‘cut through’ fake outs when drawing trend lines
- Price Action traders can target reversal candlestick patterns at well defined lines
- Watch for when a candle closes beyond a clear line for breakout trade opportunities
- Lines that run in parallel to each other create channel structures
- Converging lines create price squeeze patterns – a potent breakout catalyst
- Diverging lines create a high volatility pattern called the megaphone!
- Trend lines that form against trend momentum can create the flag pattern (dam wall effect)
- Watch for candles to close beyond the flag pattern as a trend continuation signal
Hopefully you’ve enjoy this tutorial!
In the comments below, please let me know what you thought, or if you would like me to expand on any of the topics discussed here.
If you would like to learn more about trading with trend lines using candlestick reversal, and candlestick breakout patterns – check out the war room for price action traders.
Speed Lines – Technical Analysis
The technical analysis Technical Analysis – A Beginner’s Guide Technical analysis is a form of investment valuation that analyses past prices to predict future price action. Technical analysts believe that the collective actions of all the participants in the market accurately reflect all relevant information, and therefore, continually assign a fair market value to securities. tool of speed lines was developed by Edson Gould, a technical analyst who became quite well known for making several accurate stock market calls during the 1960s and 1970s. They are sometimes referred to as “speed resistance lines”, however, that moniker is somewhat misleading since the lines are designed to represent both support and resistance levels.
Understanding Speed Lines
Speed lines are what is known as a fan tool – one that reveals multiple potential support or resistance trend line levels – similar to the Fibonacci fan or Gann fan. Each of the three lines that comprise this indicator shows possible support (in an uptrend) or resistance (in a downtrend) levels that may serve as future turning points for a security’s Equity Trader An equity trader is someone who participates in the buying and selling of company shares on the equity market. Similar to someone who would invest in the debt capital markets, an equity trader invests in the equity capital markets and exchanges their money for company stocks instead of bonds. Bank careers are high-paying price.
How to Draw Speed Lines
Although you can simply apply a speed lines indicator to a chart, speed lines are also easy to draw yourself.
The first speed line in an uptrend is drawn from the low price point, or start, of the uptrend to the most recent high price reached in the trend. The second line, which is known as the 1/3 line, is then drawn from the low price to the price point that represents a one-third retracement from the high toward the low. The third line, the 2/3 line, is drawn from the low to the price level that represents a two-thirds retracement from the high.
For example, if a stock Stock What is a stock? An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms “stock”, “shares”, and “equity” are used interchangeably. advanced over a period of time from $10 a share to a high of $50 a share, then speed lines would be drawn as follows:
The first speed line would be drawn from the $10 low price level to the $50 high.
The 1/3 line would be drawn from the $10 low to the $37 level. (The total advance of the stock is $50 – $10 = $40. One-third of $40 is approximately $13. $50 – $13 = $37.)
The 2/3 line would be drawn from the $10 low to the $24 level. (Two-thirds of $40 is approximately $26. $50 – $26 = $24.)
Both the 1/3 and 2/3 lines are essentially trendlines that indicate possible support levels in the event of a downside corrective retracement during an overall uptrend.
Applying speed lines to a downtrend, the first line is drawn from the recent high price the downtrend began from to the most recent low of the downtrend. The 1/3 line would be drawn to represent a one-third upward retracement of the downtrend, and the 2/3 line to represent a two-thirds retracement of the downtrend.
Speed lines can be redrawn in the event that a market makes a new, higher high or lower low.
Using Speed Lines
In an uptrend, when a downside retracement occurs, a trader looking for a price point to buy into the market based on a belief that the overall uptrend will resume following some corrective downside price movement may use speed lines to identify potential support levels at which to consider buying.
Speed lines are not intended to be used as standalone technical indicator Finance CFI’s Finance Articles are designed as self-study guides to learn important finance concepts online at your own pace. Browse hundreds of articles! . Rather, they are designed to identify price levels where traders can use other technical indicators to study price action – such as candlestick patterns – in order to determine if the market does indeed appear to be finding support and consolidation, or if price action shows the market likely to fall further.
If price falls below the 1/3 line, the next level to look for support to form is at the 2/3 line. If price finds support and begins moving upward again from the 2/3 line, both the 1/3 speed line and the first speed line (drawn from the low to the high) may act as resistance levels for the resumed uptrend and potential trend reversal points.
If price continues to fall below the 2/3 line, this is interpreted as meaning that the uptrend is no longer valid, that the market has transitioned from an uptrend to a downtrend. A trader can then construct a new set of speed lines applied to the downtrend.
In a downtrend, the 1/3 and 2/3 speed lines represent potential resistance levels from which the market may turn back to the downside after an upside corrective retracement.
Adding a Fourth Line
Although it is not part of the speed lines calculation, many traders will also draw a fourth potential support/resistance trendline at the 50% retracement level of an uptrend or downtrend. This is because 50% retracements of long-term trends have been shown to commonly occur. A 50% retracement line will fall between the 1/3 and 2/3 speed lines.
When Speed Lines are Most Helpful
Speed lines are used to help traders Equity Trader An equity trader is someone who participates in the buying and selling of company shares on the equity market. Similar to someone who would invest in the debt capital markets, an equity trader invests in the equity capital markets and exchanges their money for company stocks instead of bonds. Bank careers are high-paying and analysts determine probable support or resistance levels within an overall trend. They can be applied across various time frames, such as hourly, daily, or weekly, but they are not designed for use when a security is in a ranging, non-trending market. By using different time frames, traders or analysts can apply speed lines to short-term, medium-term, and long-term trends.
Speed lines are most useful when applied to securities that are trading in a long-term, well-defined trend and whose trading is not typically characterized by high volatility. Speed lines are generally less useful when applied to securities characterized by choppy or extremely volatile trading.
Trends and Volume Spread Analysis (Masters of the market. Part 3)
Trends and Volume Spread Analysis
If you don’t know the trend direction, it is difficult to identify the right place and the right time to enter a trade. That is why I will devote today’s lesson to constructing trend lines and their application within the VSA model.
This article continues the series of lessons devoted to Volume Spread Analysis.
In the previous articles:
- Masters of the market. Part 1 here, I described the basics of how the market operates in general, the influence made by market-makers on the price movements, and how to tell whether the market is strong or weak.
- In the next article, The basics of market reading. Masters of the market. Part 2, I explained the basics of the market reading, identifying lack of demand, testing supply, pushing up through supply, and many others.
Today, I will deal with the following techniques of the market reading:
- constructing trend lines,
- bottoms and tops,
- trend lines and perceived value,
- using trends to identify overbought and oversold levels,
- pushing through support/resistance levels,
- absorption volume and lower trend lines.
Why do you need to draw trend lines on the price chart?
To identify the direction of the underlying trend. Markets are generally moving in one general direction or a trend about 30% of the time. If you determine this direction, you will anticipate how the price will change shortly.
To identify breakouts and changes of direction. A strong move up or down will often be followed by a strong move in the opposite direction.
To identify support and resistance levels. Price bars on the chart often rebound from the trend lines. As well as using the current trend lines, old trend lines originating well back in the chart’s history can be used to identify areas of particularly strong resistance or support.
Rules to construct trends channels
In an uptrend, we use two low points and one intervening high point. Accordingly, in a bear market, we use o use two high points and one intervening low point.
An example of constructing a bearish trend channel. The highs and the low, along which the lines were constructed are circled in the chart.
What trends should be taken into account?
When we look at trends, they are often classified as long-term (major), intermediate, short-term (minor). A long-term trend should be seen as the basis for choosing the trend type. At the same time, the intermediate (middle-term) trend is of excellent use when combined with VSA charting techniques, allowing to determine optimal market events in terms of frequency and intensity.
It makes sense to pay attention to minor trends and counter-trends within overall trends. They will help you identify the most optimal entry point.
In addition, I recommend compare signals discovered in two or more timeframes and make any conclusions only if the signals coincide. This way, your forecasts will be more accurate.
What do price extremes mean?
When you analyze the highs and lows in a trend channel, you learn the following:
- The sign of strength (weakness) is consecutively higher lows (lower highs).
- In addition to rising (lowering) channel’s extremes, the consecutively higher lows for a bullish trend and consecutively lower lows for a bearish trend of each bar indicate that the professional money is supporting the move.
In the above BTCUSD chart, both conditions are met. Consecutively lower tops are circled. Red zones mark the periods when the professional money was supporting the down-move. In this period, the high of each bar was lower than the previous high.
By the way, these rules can be interpreted as the reversal signals. The first lower high in a bull trend or higher low in a bear trend could be considered as an indirect signal of the trend exhaustion.
However, you shouldn’t forget that old trend lines can be used to identify the support and resistance zones. It means that professional traders will have to make an effort to break through these levels, as the market itself tends to follow the path of least resistance. So, if the volume increases when the price is approaching the support/resistance level, this level is likely to be broken out.
You see form the BCTUSD daily chart that the trend line breakout in the green zone is on the increased volume. When the line is broken out, it doesn’t lose its properties, having an influence from the other side. In a bullish trend, it is a new support level, in the bearish trend, it is the resistance. It means that it takes an effort to break it out from either side.
Trend lines and perceived value
To understand why trend lines are perceived as the support and resistance levels, I will give a simple example. Suppose we have three traders who have been trading the same instrument at the same time.
- The first one bought near the highs and was locked-in when the price suddenly fell. He is now holding out in the hope of reducing his loss.
- The second one bought earlier and sold with a small profit. When he saw the price continue rising, he entered a purchase again and sold when his stop-loss was triggered by the price fall for a small loss.
- The third one shorted and is in profit.
The difference between the imagined traders is that they perceive the value differently:
- The first trader is in a panic. He wants prices to rise so he can reduce his losses. If prices continue to fall, he is going to be shaken out of the market at some stage.
- The second one is not concerned about his money as the overall losses are small. He is out of the market and is looking for a new trading opportunity to enter a long. He expects prices to fall and is waiting for a buying opportunity
- The third one knows what he is doing. He sees the market weakness and has a good short position expecting prices to keep on falling. He has placed a stop-loss order above the market to protect his profits.
This just a case with three traders. In practice, there are many thousands of ways the asset value is perceived. Some are looking for trading opportunities, some are hanging on at a losing trade, some are waiting for a good moment to take the profit. One way or another, they all identify the trend borders. Differently put, perceived values tend to increase in a bullish market and fall in a bearish market. The trend channel is a graphic display of averaged hopes and expectations of the market participants.
Using trend line to determine overbought and oversold levels
The area between the upper and lower trend lines is known as the trading range. The market can be going sideways within the range. In the VSA terms, the (sideways) market is trading within its range and will continue to do so until applied (selling or buying) effort makes it break out.
Using the VSA principles, we shall analyze price action in the top and bottom quarters of the trading range, because important observations take place in these areas. I shall also mention the so-called overbought zone that is above the supply (higher) trend line and the oversold zone that is below the support (lower) trend line. The middle of the range represents the mean of the data. Here there is no vulnerability to a move in any direction
The price move tends to go to the edges of the established trend channel (first to the quarter, then, to the overbought/oversold zone) if there is an imbalance of supply and demand. Besides, when the price goes closer to the edge of the channel, the price is getting more likely to roll back into the old trading range; in the overbought/oversold area, this likelihood increases.
The edges of the trend channel are marked with the purple line in the daily BTCUSD price chart. The red zones mark the bars gone into the oversold area. Besides, when the price touches the bottom, the low volume indicates that professional traders are not bearish, which pushes the price back up into the trading range.
I also want to mention a strange phenomenon that can occur. I have already mentioned that the trend boundary line offers resistance in both directions. So, if the price goes far into the oversold zone, the resistance level becomes the support. And vice versa, in a bear move, the support level now is the resistance to the sellers. Let us see an example.
You see from the chart, the price breaks through the resistance line with some increase in volume (marked with the green zone). After this, the resistance level becomes the support. Further, the price with no significant volume continues moving in the original direction only being supported by the new support line. It now will take an effort to break it out downside.
This phenomenon is explained by the action of market-makers or specialists. If there has been an increased effort to go up and through the upper trend line (resistance), most of these professional traders may have taken a bullish view. Now, as the price approaches the line again, this time from the opposite direction, you will still need the effort to break it out downside. However, if the specialists are still bullish, there will be no effort to go back down. This is indicated by low volume when the price is approaching the new support line.
Analyzing volume near a trend line
As I have said many times, it will take professional activity, money, and effort to change the trend. The effort to penetrate trend lines is usually seen as prices approach the line, not actually on the line. Most often, it looks like wide spreads up (or down), with increased volume.
Another way to overcome the resistance is gapping that I described in detail earlier. Price gaps, when there is a big distance between the previous close and the current open, always result from the activity by the market-makers or specialists.
This effort must always be cost-effective. For example, they are unlikely to push up through resistance unless they are bullish. And if the support is broken out, it signals that the professionals are bearish.
In the four-hour BTCUSD chart, there are two wide spread bars on fairly high volume. Furthermore, the volume starts increasing once the price is just approaching the lower trend line. After the support level is penetrated, the volume shrinks, and, finally, the market goes in the direction of the previous trend. Remember, we have already seen this phenomenon in other examples.
In longer timeframes, for example on a daily or weekly, the increased volume will correspond to the bar that penetrates the trend line. So, shorter timeframes are more convenient to spot the effort when the price is only approaching the trendline.
In some cases, the price moves up in price and reaches the upper trend line, and high volume appears with a wide spread up-bar. But you do not see any results on the high volume by the next day (or bar), the price doesn’t continue growing. In these cases, The high volume must have contained more selling than buying, which, of course, doesn’t support the up-move. In a down-move, the high volume results from more buying than selling in these cases. To avoid great losses, you should carefully track the price moves and immediately close the position, if the trend is not confirmed on the next bars.
Pushing through resistance/supply levels
If you observe a wide spread up-bar, on high volume, breaking through the top of a trend channel (resistance line), and the next day it is around this level or even higher, then you would now be expecting higher prices. Any low volume down-bar next day (meaning a potential test) will confirm this view. The rule works in the opposite direction as well. If there is a wide spread down-bar breaks through the lower trend line (support level) on high volume, and the next day it is around this level or even lower, then you would now be expecting lower prices in the bearish trend.
The bar that punches the upper or the lower trend line represents pushing through the level.
The chart displays the wide spread up-bar (marked with a circle), on high volume, breaks through the lower trend line. I want to focus again that the volume is high. The next bar is also down, and the volume is still high. It means that market-makers are bearish, so, the price will hardly roll back to the trading range, at least in the short run.
Moving towards resistance and support
If a wide spread bar, on low volume, approaches the resistance level but doesn’t break it through, the price is likely to be trading in the previous trading range in the short run. This pattern may also signal the sideways trend.
In the BTCUSD chart, two wide spread bars on high volume are driving the price near the upper trend line. It is followed by the third bar (marked with the oval zone), that very closely approaches the resistance level and closes in the upper quarter. This bar is on low volume, which means that the professionals are not bullish now.
Next, the price rolls back to the middle of the trend channel (in the previous lesson, the VSA principle, “effort versus results”). Summing up, all this indicates that there is not enough effort (i.e. buying) to break through the resistance. Therefore, the price should be trading within the trend channel.
The same is with the bear move. In a down-move, where the price is getting close to the lower trend line (Support Line), any low volume appearing will tell you that there is not enough selling effort to break through the line.
A few days after the studied example, the price is approaching the support line (marked with an oval in the chart). However, the spread is narrow, and the volume is low, so there should be no effort to push through the lower trend line.
Absorption volume and lower trend line
High volume on a down-bar, as it nears or touches the lower trend line usually indicates that there is strong selling pressure, and the price can potentially go outside the trend channel. But, if the price is up on the next day, it must show that the high volume down-bar contained buying. This is the so-called absorption of the selling, which is the signal of the market strength.
However, before a proper rally takes place, you will still need a phase of accumulation featured with low volume. The longer time it takes, the stoner up-momentum will receive the market.
Oval zone marks the down-bar that approaches the lower trend line on high volume. It is followed by an up-bar accompanied by comparable effort. This indicates the absorption volume that next develops into the accumulation phase with fairly low volume. After this phase finishes, the professional activity surges and there is a strong bear move.
This all for today.
In the next lesson, I will deal with the anatomy of bull and bear markets and will introduce the trend clusters. Subscribe to the trader blog and be on top of crypto trading!
I wish you good luck and good profits!
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Price chart of BTCUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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