Downward Trend Lines and Channels
A downward trend line is drawn above the pattern formed by consecutive lower highs, it must connect at least two highs, with the most recent high being lower. For our examples we shall use the MetaTrader 4 technical analysis software charts to illustrate an example.
Since price moves down in a zigzag manner traders normally draw a line which shows the general downward direction. In Foreign exchange market technical analysis, this general direction is referred to as the TREND by currency traders. In technical analysis definition we can define this down trend line is plotted on a Forex chart showing the resistance levels (bearish market direction).
A downtrend occurs when the price makes a series of lower highs and lower lows. Each high is lower than the previous high - lower high, and each low is lower than the previous low - lower low therefore showing bearish price movement.
Downtrend lines gain more validity each time price touches but does not penetrate the line. A downtrend remains the general direction until this series of lower highs and lower lows is broken.
In technical analysis, An upside penetration of an downtrend line is a technical buy signal, and usually the first indication that the bearish direction of a currency may soon reverse.
Drawing a Downward Trend Line
When it comes to learning how to draw and learning technical analysis of currency charts, you need to know that when the market is bearish it forms lower lows and lower highs forming a downward general direction. These are the points that are used.
To draw this setup we use resistances and to do it correctly two resistances are needed. When price touches this line, then we sell and place stop loss just a few pips above the sloping resistances;
Trading This Market Move
When trading with this method, this setup will show the general direction of the market as downwards therefore traders will only open short sell trades. These are the levels where if price retraces then this points will provide strong resistance. This is why many short sellers will wait until price retraces upwards and hits these retracements levels to open trades. Trades opened at this levels have a very high Reward to Risk Ratio and are very profitable
For Example, in the above example, a trader would have opened short sell signals at the resistance1, resistance2, resistance3 and these trades would have made a lot of profits with minimum amount of draw-down/retracement.
How to Draw a Channel
A channel is plotted by drawing a line that is parallel to the downward trend line and then adjusting it to touch the bottom boundary of the price movement. This then forms a channel and as long as the price stays between these two channels the general market direction is intact the market direction will continue being bearish.
Trading The Channel
The downward channel is used by traders to show levels where it best to take profits. Currency traders will take some profit once the price touches the lower channel or the lower channel and wait for another retracement before opening a short sell trade again.
MetaTrader4 Tools For Drawing
The tools to draw these studies on the MetaTrader 4 are located on the Lines Toolbar within the MetaTrader 4, to access this toolbar if it is not activated on your MetaTrader4 Platform, Click in "View" Next to "File" at the top left corner of the MetaTrader 4 Trading Platform and click View, Then Click on Tool bars, Then Check the Lines Toolbar by clicking on it.
Below is the screenshot of these MetaTrader 4 tools: just click on this tool and select the point to where you want to place this tool on the currency chart.
MetaTrader 4 Technical Analysis Charts
MetaTrader 4 Toolbar used to obtain these tools is shown above, to plot these setups or a channel, just select the above drawing tools shown on the MetaTrader 4 software and select the two points where you want to draw.
This strategy is one of the simplest and popular technical indicators used by traders to analyze the currency market direction.