Drawing Downward Trend Lines and Channels
A Downward trend line is a line drawn on the Gold trading chart when the general trend of the prices is moving downwards and therefore this line is drawn above these downwards trending prices by connecting at least two highs of the downward price trend. This line will show the general trend of the market to be downwards.
The example below explains this concept and explains how prices move when in a downward trend. When the market is moving downwards it keeps forming new resistance levels as it moves downwards and these resistance levels are the ones used to draw the downward trend line.
Because the market moves in a zigzag manner, traders will normally draw a trend which shows the general downwards trending direction.
Downward Trending Market
A downward trend occurs when the price of Gold makes a series of lower lows and lower highs. 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.
Downward trend lines gain more validity each time price touches these lines 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 a downward trend line is a technical buy signal, and usually the first indication that the bearish direction of Gold prices may soon reverse or at least start to consolidate.
Drawing a Downward Trend Line
When the online Gold metal market moves down it forms lower lows and lower highs forming a bearish market movement. A downward trend line can then be plotted by connecting these lower highs.
To draw this setup we use resistance levels made by the prices. To draw a downward trend line correctly two resistance levels are needed. When price touches this downward trend line we buy and place a stop loss just a few pips above this trend line. The diagram below shows an example of a downward trend line.
Downward Trend Line - Gold Trading
The trend line setup will show the general direction of the Gold market as bearish therefore traders will only open sell trades as long as price movement is within this setup and within the resistance levels. These are the levels where if the market retraces then these points will provide strong resistances for the price. This is why many sellers will wait until price rallies upwards and hits these retracements levels to open sell trades. Trades opened at these levels have a very high Risk: Reward Ratio and are very profitable.
In the above setup the trader would have opened sell/short trades from the signals generated at the resistance1, resistance2, resistance3 and these trades would have made a lot of profits with minimum amount of draw-down/retracement. This is why many traders like to trade using this trend line trading setup.
Drawing Downward Channel
A downward channel is drawn by drawing a line that is parallel to the Downward trend line and then this new line is adjusted to touch the bottom boundary of the price movement. This then forms a channel of the price and as long as the price stays between these two channels the bearish market movement of Gold prices will continue moving down.
Downward Channel - Gold Trading
Trading the Downward Gold Prices Channel
This Downwards channel is used by Gold traders to show levels where it best to take profits. Gold metal traders will take some profit once the price touches the lower channel and wait for another retracement before opening another sell trade again.
MetaTrader 4 Tools for Drawing Downward Trend Line and Channels
The tools to draw these setups on the MT4 are located on the MetaTrader 4 drawing toolbar within the MetaTrader 4 platform, to access this toolbar if it is not activated on your platform, Click in "View" Next to "File" at the top left corner of the MT4 and click "View", Then Click on "Tool bars", Then Check and select the "Lines Toolbar" by clicking on it.
Below is the screenshot of the MT4 trend lines drawing toolbar. To draw a trend line on a Gold trading chart just click on this tool and select the point where you want to draw.
MetaTrader 4 Toolbar for Drawing Downward Trend Line and Channels