Whats the psychology behind trend lines and channels?

[CallMePaul]

Hello,

I am new to trading so excuse if this is somehow an obvious question.

I really don't like to do what I cannot understand, and the logic behind prices 'stopping' at trend lines is something I still cannot understand.

I find logic in 'horizontal' support and resistance levels were market participants seem to agree that X price is too high/low, but why do prices stop following a trendline? Is it that everyone is looking at the same trendline? that can't be the answer! Is it just coincidence?

Any tip on understanding them will be much appreciated!
Thanks

 

[wino59]

Hello,

I am new to trading so excuse if this is somehow an obvious question.

I really don't like to do what I cannot understand, and the logic behind prices 'stopping' at trend lines is something I still cannot understand.

I find logic in 'horizontal' support and resistance levels were market participants seem to agree that X price is too high/low, but why do prices stop following a trendline? Is it that everyone is looking at the same trendline? that can't be the answer! Is it just coincidence?

Any tip on understanding them will be much appreciated!
Thanks

I don't trade charts anymore, Price action only, but here is the deal...when you come up against support or resistance the players are trying to push it one way or another, so everyone knows where that level is once it is broken that is usually where stops are triggered and help facilitate the move in the direction it is broken.

Let's say it starts to get to the resistance level, and you are short the market is going up and you are counting on that resistance level to hold, it breaks out, so now what do you do? You bail and help the market go higher, you are covering (buying) and new people are jumping on board, so the market rallies, once the longs have their profit, they are going to start covering going (short) this is where the market stops and reverses. Also the reason for false breakouts.

Why a trendline or support and resistance hold is simply because the buyers or sellers at that price level outweigh the other... it is an auction everyday, what someone is willing to pay and sell it for, nothing more, nothing less, and a chart only shows what has happened, not what is happening.

Just my 2 cents.

 

[malaguti]

Hello,

I am new to trading so excuse if this is somehow an obvious question.

I really don't like to do what I cannot understand, and the logic behind prices 'stopping' at trend lines is something I still cannot understand.

I find logic in 'horizontal' support and resistance levels were market participants seem to agree that X price is too high/low, but why do prices stop following a trendline? Is it that everyone is looking at the same trendline? that can't be the answer! Is it just coincidence?

Any tip on understanding them will be much appreciated!
Thanks

mostly coincidental in my opinion. sometimes you can find a trend line, often you can't and are often only drawn after the trend has practically ended. knowing the trend in the first place is far more important, you'll be waiting a very long time for it to touch the line again and then it will just break it, you short, just for it to go back in its previous direction.
also, what one person will draw, will differ from anothers'

 

[CallMePaul]

I don't trade charts anymore, Price action only, but here is the deal...when you come up against support or resistance the players are trying to push it one way or another, so everyone knows where that level is once it is broken that is usually where stops are triggered and help facilitate the move in the direction it is broken.

Let's say it starts to get to the resistance level, and you are short the market is going up and you are counting on that resistance level to hold, it breaks out, so now what do you do? You bail and help the market go higher, you are covering (buying) and new people are jumping on board, so the market rallies, once the longs have their profit, they are going to start covering going (short) this is where the market stops and reverses. Also the reason for false breakouts.

Why a trendline or support and resistance hold is simply because the buyers or sellers at that price level outweigh the other... it is an auction everyday, what someone is willing to pay and sell it for, nothing more, nothing less, and a chart only shows what has happened, not what is happening.

Just my 2 cents.

Thanks a lot Wino. So basically there is no difference between an horizontal resistance and a trendline resistance. If the price hold the line it is OK to consider it a resistance / support point.

I will try to read more about them. I still think I understand why prices stop at the same time they stopped before (horizontal support/resistance) but I am not sure I get the logic of why the use and inclined trendline as support/resistance. Why is it exactly at that point and not a little bit above/below.

Thanks a lot for your help!

 

[CallMePaul]

mostly coincidental in my opinion. sometimes you can find a trend line, often you can't and are often only drawn after the trend has practically ended. knowing the trend in the first place is far more important, you'll be waiting a very long time for it to touch the line again and then it will just break it, you short, just for it to go back in its previous direction.
also, what one person will draw, will differ from anothers'

Thanks, your point of view is really interesting. Once I read that one can draw practically anything on a candle chart...

 

[Pferd]

Yes, in my opinion there is difference between horizontal and diagonal lines. It dependes whether the market is in a so called barrel or horizontal channel or whether is trending (lower/higher lows/highs)up or down. If you look at a graphic of the IBEX during 2013 you can see that very well. It was going up and down during most of the year and now is in an uptrend. Some people like to trade inside these barrels and they are really profitable. Myself and many others don't like this style. I prefer up and down trends. I think also that this is the opinion of the majority. But that does not mean that you can not trade horizontal channels, depens on your preferences.

Probably there is no real logic behind all these trendlines, FIB levels, etc. The problem is that everybody is looking at them, so whatever we think is not important, main issue is that most often than not you will find the prices stopping right there, so it is something you have to consider all the time. Some other people just trade false breakouts when they come back inside the channels. That is also a valid strategy. You have to find the one you are most comfortable with.

 

[timsk]

So basically there is no difference between an horizontal resistance and a trendline resistance. If the price hold the line it is OK to consider it a resistance / support point . . .

Hi CallMePaul,
This is a contentious subject in as much as there are many traders who will argue until they are blue in the face that trend lines provide support and resistance (S/R) and that price is in some way subservient and respectful of these all powerful and magical lines. I take the opposite view. For a new trader, I would advocate airing on the side of caution to start with and assume that the lines are just lines and not invest more in them than they were originally designed for. If, having studied them in detail, and with a steadily rising equity curve, you decide that they do indeed possess magical powers - that's fine. For now, treat trend and S/R as two completely separate things that serve two completely separate purposes.

Let's start with trend. A trend line, be it one that's hand drawn by the trader or a moving average (MA) overlaid on a chart by the software, simply indicates whether the trend is up, down or sideways. Nothing more. If this is all you ask of the lines - they will serve you well. Keep it simple. Note where the current price is in relation to the trend line. For example, if price is a long way above a rising trend line, do you want to be long or short the market? Received wisdom says trade with the trend and, in this case the trend is up, so your answer might be to go long. However, price rarely stays a long way above a rising trend line for long, indicating that the market might be overbought. A pullback or, even, a reversal is more probable than not, indicating that you might do well to sit on your hands for the time being or look for opportunities to go short.

I would advise any trader to rid themselves completely of the notion of price 'doing' anything at any line of any type drawn on a chart. Prices change because that's where traders are buying and selling. It's the price that offers S/R, the drawn line is merely a simple graphical representation to show where key prices are. It's an obvious comment to make I know, but traders do tend to get caught up in the lines themselves - rather than what the lines represent. S/R lines then, unlike trend lines, relate to a specific price level. As such they must be horizontal. Sometimes, quite often in fact, support will hold and price will reverse back up and, when it does, it will coincide with a rising trend line. This is coincidence and inevitable to some extent. The one possible exception to this is the 50 MA and 200 MA on a daily chart, as they are so widely used that they are self-fulfilling. Sometimes!

The bottom line is: separate out the two functions and keep them apart. They are to the trader what red and green are to the artist. Mix the two colours together and all you get is a dirty muddy brown colour. Ask your trend lines to indicate the trend and nothing more. Draw your S/R lines according to previous key levels where price has reversed, as these levels may prove to be important levels again in the future. Note 'may'!
Tim.

 

[lucas_king]

Hello,

I am new to trading so excuse if this is somehow an obvious question.

I really don't like to do what I cannot understand, and the logic behind prices 'stopping' at trend lines is something I still cannot understand.

I find logic in 'horizontal' support and resistance levels were market participants seem to agree that X price is too high/low, but why do prices stop following a trendline? Is it that everyone is looking at the same trendline? that can't be the answer! Is it just coincidence?

Any tip on understanding them will be much appreciated!
Thanks

Price action is the aggregate psychology of all market participants. If something trades sideways, we assume it will keep doing so unless it breaks out or down from the channel. As you say, things bounce up or down when people consider price too high or low. They bounce up as longs add to existing position when shares back at entry point, shorts buy to cover as low as possible to reduce their loss-making position and those on side-lines jump in seeing price rise. All the extra interest in buying bids up the price. The same in reverse. When shorts start adding to existing position at entry point, longs start selling out at as high a price as possible, and those on side-lines jump on short wagon when they see the price fall. All the extra interest in selling sends the price down. This can happen horizontally as well as in a rising or falling trend. If there are three or more highs/lows can be joined to make a trendline line, the extension of this line is often respected into the future as support/resistance. The more the price uses the trendline, the stronger the vested interest in the trendline/levels and the greater the chance it remains support/resistance in the future. The more obvious the trendline you can draw (be it sideways, rising or falling), the more chance the market has seen it too and that it comes into play as support or resistance. I hope this helps. Best of luck trading.

 

[CallMePaul]

Thanks all a lot for your posts. I am reading some valuable information. At the same time in trading I find there are so many different points of view about the same subject that the only way is to have your own conclusions about it.

Many times I find myself thinking I found the perfect set of knowledge just change it completely as soon as I open the next book. And as there is no such thing as a "perfect" understanding of the market its hard to decide with which 'rules' to stick.

I will definitely keep posting questions in the forum as I find it really useful for my learning.

Thanks again!

 

[Babyblush]

We need to understand that there can be only two type of trades at such price levels either bounce trading or breakout trading. Keep it simple for understanding better.

 

[timsk]

We need to understand that there can be only two type of trades at such price levels either bounce trading or breakout trading. Keep it simple for understanding better.

Babyblush,
You're welcome to express your ideas and opinions about trading, but don't present them as facts and in an authoritative way that gives the impression that you know what you're talking about. Clearly, you don't!


Basic Trading Styles
Most TA based methodologies fall into one of three main categories: reversals, breakouts and retracements. The ‘Basic Trading Styles’ graphic below illustrates the core idea behind each of them.



Reversals, breakouts & retracements
The key thing to note about these three styles is that they usually negate one another. The reversal trader who sold price at 1 would have sold to a breakout trader. The breakout trader who bought at 2 would have bought from a reversal trader looking for a possible double top at the previous day's high. The retracement trader who went long between 3 and 4 would have bought from a reversal trader who sold the recent pivot high. So on and so forth. This explains why TA patterns fail much of the time: for one pattern to 'work', another pattern has to break down.
Tim.