🎯 In 30 seconds: A trendline is a guess about the pace of a trend, drawn as a straight line. Its value depends on drawing it the same way every time. Pick anchors by a swing rule, decide whether you use wicks or closes, allow a small touch tolerance, and write down what counts as a break before price gets there. Channels add a line on the other side. When a hand-drawn line feels too subjective, a regression channel gives a version nobody can bend.
A trendline is a claim about pace
When you draw a rising line under a chart, you are saying something specific: buyers have been willing to pay about this much more per day, and pullbacks have stopped near this pace.
That is a testable statement. The problem is that the person drawing the line also chooses the anchors, the angle and the moment to stop believing it. Without rules, a trendline becomes a mirror for whatever you hoped to see.
Five rules for drawing honestly
| Decision | A fixed choice you can write down |
|---|---|
| Anchors | Only swing points found by your swing rule, such as your zig zag setting. No “close enough” lows. |
| Price used | Either the extremes (wicks) or the closes. One method, every chart. |
| Touch tolerance | A third touch counts if it comes within, say, a quarter of an average day’s range. |
| Break rule | For example, a close beyond the line by more than half an average day’s range. |
| Scale | Log for long or steep moves, linear for short ones. Note which you used. |
The anchor rule does most of the work. If you allow yourself to start the line from any low that looks good, you can make almost any trend look intact. The market structure chapter shows how to fix a swing rule.
What counts as a break
Price pokes through trendlines all the time. A wick that dips below and closes back above is not much of a statement. A close just below the line may only be noise.
A buffer based on the stock’s own movement helps. The average true range (ATR) measures a typical day’s full range, including gaps. The volatility chapter explains how it is calculated.
Hypothetical example: a rising trendline sits at $50.00 today and ATR is $2.00. Your rule says a break needs a close more than half an ATR below the line. That puts the trigger at $50.00 minus $1.00 = $49.00. A close at $49.40 is a warning. A close at $48.80 is a break.
Some traders also ask for two closes beyond the line. Each extra condition cuts false alarms and makes you later on the real ones. Pick one version and keep it.
Fan lines: when a trend slows down
A trend that starts steeply rarely keeps that angle. When the first line breaks, price often keeps rising at a slower pace. Draw a second line from the same starting low through the next swing low, and then a third if needed.
Older chart books describe this as a fan and treat the third break as the more serious one. Read it as a description of slowing momentum: each line holds for a shorter stretch and at a gentler angle. It does not tell you how far the eventual decline will go.
The reverse also happens. A trend can speed up, leaving its first line far below. A steeper line drawn from a later swing low then becomes the one to watch, and its break usually means the trend is returning to its earlier pace, not ending.
Channels and what overshoots tell you
A channel adds a parallel line on the opposite side, through the most prominent swing high in an uptrend. It shows the usual width of the swings.
- Overshoot. When price closes clearly above the upper line, the trend may be speeding up. Some traders redraw the channel steeper. Others treat it as stretched.
- Falling short. When a rally fails to reach the upper line, buyers are getting weaker. It often comes before a break of the lower line.
- The midline. Halfway between the two lines is a reasonable place to watch for a pause in either direction.
The regression channel: an objective check
A linear regression channel fits a straight line through every close in a window, using least squares. It then draws outer lines a set number of standard deviations above and below.
Its strength is that nobody picks the anchors. Its weakness is that it changes when the window changes. Add ten more days and the whole channel tilts. Treat it as a description of a chosen window, not a fixed level. A good habit: if your hand-drawn line and the regression line disagree sharply about the slope, ask why before you act on either.
Log or linear changes the line
A steady percentage trend curves upward on a linear scale. A straight line drawn under it will be broken sooner than the same line on a log scale. Over a few weeks the difference is small. Over a year or more, it can move the break date by weeks. The price bars chapter shows the two scales side by side.
- A trendline is at $80 and ATR is $3. With a half-ATR buffer, what close counts as a break? Answer: A close below $78.50.
- Why fix the anchor rule before drawing? Answer: Free choice of anchors lets you draw a line that fits any story, so the line stops being a test.
- What does a rally that falls short of the upper channel line suggest? Answer: Buying pressure is weakening, which often comes before a break of the lower line.
- What is the main drawback of a regression channel? Answer: It shifts whenever the window changes, so it describes a chosen period and is not a fixed level.
Sources
- Robert D. Edwards and John Magee, Technical Analysis of Stock Trends (first published 1948)
- John J. Murphy, Technical Analysis of the Financial Markets (1999)
- J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978), for average true range
- Perry J. Kaufman, Trading Systems and Methods, further reading on regression channels
- Moneydesks Technical Analysis tool (trend line and ray tools, linear regression channel, ATR)