Chart Analysis · Lesson 7 · Advanced
Trendlines, Channels and Retracements
You construct valid trendlines and channels, validate breakouts by close, and recognize confirmation bias in choosing lines.
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Construction
An uptrend line runs below consecutive reaction lows, across the whole range, not just the closes. Two points draw the line, the third touch validates it. The more often it is tested, the more significant its break.
Validation and retracement
A break only counts on a close beyond the line plus a filter of around 3 percent. Pullbacks typically correct 33 to 50 percent, at most 66 percent. Beyond that it is more of a trend reversal than a correction.
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And in a downtrend
As a mirror image, a downtrend line runs above consecutive lower highs, that is above the falling highs. It is resistance. Only a close clearly above it puts the downtrend into question.
Now reversed: above the falling highs.
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The key points at a glance
- Uptrend line below the reaction lows, draw with two points, the third touch validates it.
- A breakout only counts on a close beyond the line, plus a price filter.
- A retracement up to 66 percent is a correction, beyond that it is likely a trend reversal.
Deep dive
Why trend lines break sooner on a log chart
In crypto, the scaling helps decide where a trend line sits. On a log chart every percentage move has the same distance, so the jump from 5 to 10 dollars looks as big as the one from 50 to 100.
- Murphy's Nikkei broke on log as early as mid-1990 at 30,000
- On linear, the same line broke only in early 1992 at 22,000
- On linear you sat in broken structure for almost 2 years
- Always chart volatile coins on a log scale over long periods
Trading a trend channel: take-profit and re-entry
A channel forms when you draw a second line parallel to the base line across the first opposing peak. In an uptrend the base line carries your longs, while the upper channel line is the zone for take-profit.
- Price target after a breakout: about one channel width further
- A break of the base line is a trend-reversal signal
- A break of the channel line in the trend direction is acceleration, so add to your position
- When price no longer reaches one side of the channel, the opposite side often breaks
The fan principle and choosing lines without confirmation bias
After the first break, beginners immediately call the reversal. The fan principle is the patience filter: price rallies back to the old line, fails, and forms a second, flatter one. Only the break of the third fan line confirms the reversal.
A straight line through two points confirms almost any bias. If you are long, you will always find a supporting uptrend line. Practice drawing and close confirmation on the demo exchange without risk.
- A valid line touches at least 3 points, and the third touch validates it
- Important uptrend lines average around 45 degrees
- Too steep means a parabolic pump, so switch to a moving average
- A break counts only on a close plus a filter of around 3 percent
Sources: Murphy, Goodman, Kahneman
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