Level 1 Reading charts · Part 3/7

Trend, Trendline, Channel

Few terms in technical analysis are used as casually and defined as rarely as “trend”. Yet the definition is precise and testable.

The definition

An uptrend exists when each swing high sits above the previous one and each swing low does too. A downtrend is the mirror image: lower highs, lower lows. Everything else is a sideways phase – and that is the normal state, not the exception.

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An uptrend is defined, not felt: (1) each swing low sits above the previous one, (2) each swing high does too. (3) The trendline connects the lows — it describes the trend, it does not hold it up.

The value of this definition is that it can be wrong. “The trend is intact” is not an opinion but a statement that a single lower low ends. Saying “it is going up” because price rose states nothing that could become false.

The trendline

A trendline connects the lows in an uptrend and the highs in a downtrend. It makes the slope visible and provides a level whose break can be observed.

Three caveats matter:

  1. Two points define any line. Only the third touch turns it into a statement about the market rather than a statement about the two points you picked.
  2. The line holds nothing up. It describes; it does not act. Price does not rise because a line is there.
  3. The scale changes it. The same prices produce differently sloped lines on linear and logarithmic scales – and therefore different break points. Switching scales until the line fits is curve-fitting.

The channel

When a trend runs evenly, a second line can be drawn parallel to the first across the opposite side. The space between them is the channel.

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When a trend runs evenly, a second line can be drawn parallel above the highs: (1) lower channel line, (2) upper channel line. (3) Channels rarely end with a bang — price simply stops filling them, as the final rally does here.

What is informative is less the channel itself than whether price still fills it. When a rally no longer reaches the upper boundary, the trend loses force long before the lower line breaks. That is one of the few classical chart observations that signals a change rather than confirming one.

Trends exist in several timeframes at once, and they contradict each other regularly. A weekly uptrend can contain a daily downtrend, which in turn consists of hourly rallies.

This is not a contradiction but a requirement: the timeframe used to judge the trend must match the intended holding period and must be fixed beforehand. Switch levels until the picture suits your position and you will always find confirmation – which is precisely why it is worthless.

Origin: Dow theory

The idea that markets move in trends and that a trend needs confirmation from the breadth of the market goes back to Charles Dow around 1900. Two of his core ideas still hold: that a trend counts as intact until it is disproven, and that a move is more credible when many instruments carry it than when few do.

That breadth is measurable – and not only in equities. The Altcoin Season Index , for example, answers exactly this question for the crypto market: is the move broad, or is it just the largest asset?

Next

Where trends turn and pause, recurring price areas usually sit – the subject of the next article.