Prices of the financial instruments can move in one direction (trend) or sideways (consolidation). A lot of traders are asking themselves which is the best way to define a trend. This is very simple. When prices make consistently higher highs and higher lows we have an uptrend. When prices are consistently making lower highs and lower lows we have a downward trend. If there is no clear trend in the formation of the consecutive highs and lows, the market is in a consolidation phase.
When you identify that the market is in a trend it is very useful to draw trend lines and price channels across the swing highs and lows. At any time multiple trend lines could be drawn and depending on the price action around them, we can decide whether to open a position or not. Standard uptrend line is drawn at the swing lows, while the downtrend line – across swing highs. Accordingly, across an opposite extreme (swing high for uptrend or swing low for downtrend) we draw a parallel line, and form a price channel.