Downward Trend Lines & Channels

How to Draw Down-ward Trend Lines on Charts

A downward trend line is plotted above the down-wards trend pattern formed by consecutive lower highs, the downwards trend line must connect at-least 2 highs, with the most recent high being lower. For our xauusd downward trend examples we shall use the MetaTrader 4 analysis software charts to illustrate example of downward trend.

Since price moves down in a zigzag manner traders normally draw a downwards trend line which shows the general downward direction of the prices. In market analysis, this general gold price direction is referred to as the TREND by traders. In technical analysis definition we can define this down trend line is drawn on a chart showing the resistance areas (bearish market direction).

A down trend occurs when price forms series of lower highs and lower lows. Each price 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.

XAUUSD Trading Down trendlines gain more validity every time price touches the down-wards trendline but doesn't penetrate the trendline. A down trend remains the general direction until this series of lower highs and lower lows is broken.

In technical analysis, An up side penetration of a down trend line is a technical buy signal, and usually the first indication that the bearish direction of gold prices may soon reverse.

Drawing a Downwards Trend Line

When it comes to learning how to draw & learning technical analysis of charts, you need to know that when the market is bearish it forms lower lows and lower highs forming a downwards general market direction. These are the points that are used to draw the downwards trend line.

To draw this downward trend setup we use resistances and to do it correctly two resistances are needed. When price touches this trend line, then we sell and place stop loss just a few pips above the sloping resistances:

How to Trade Downwards Trend Line

When trading with this trend line method, this trend line setup will show the general direction of the market as downward therefore traders will only open short sell gold trades. These are the levels where if gold price retraces then these points will provide strong resistance. This is why many short sellers will wait until gold price retraces upwards and hits these retracements levels to open sell gold trades. trades opened at these levels have a high Risk to Reward Ratio with minimum draw down.

For Example, in the above example, a trader would have opened short sell signals at the resistance1, resistance2, resistance3 and these sell gold trades would have made a lot of profits with minimum amount of drawdown/retracement.

How to Draw a Downward Channel

A downward channel is drawn by drawing a line that's parallel to the downwards trendline & then adjusting it to touch the bottom boundary of the price movement. This then forms a down-wards channel & as long as a price stays between these two channels the general market direction is intact the market direction will continue being bearish.

Trading the Downwards Channel

The downward channel is used by traders to show levels where it's best to take profits. Traders will take some profit once the price touches the lower channel & wait for another retracement before opening a short sell gold trade again.

MetaTrader 4 Tools for Drawing Channels

The tools to draw these channels studies on the MetaTrader 4 charts can be found on the Lines Toolbar within the MetaTrader 4 platform, to access this MT4 tool bar if it is not activated on your MetaTrader 4 Platform, Click in "View" Next to "File" at the top left corner of the MetaTrader 4 Platform & click View, Then Click on the Toolbars, Then Check the Lines Tool-bar by clicking on it.

Below is the screenshot of these MetaTrader 4 tools: just click on this MT4 channels drawing tool and select the point to where you want to place this channels tool on the chart.

MT4 Technical Analysis Charts - Downwards Channels

MetaTrader 4 Toolbar - MetaTrader 4 Tools for Drawing Trend Lines & Channels used to obtain these trendline drawing tools is shown above, to draw these trend line setups or channels, just select the above MetaTrader 4 trendline drawing tools shown on the MetaTrader 4 software and select the two points where you want to draw the downwards trendline.

This trend line strategy is one of the simplest and popular indicators used by traders to analyze the market trend direction.