To complete the definition of an up trend, the Wyckoff trader needs to define the over bought line of the trend. This line is constructed parallel to the demand line. It passes through the top of the rally or advance that is between the two reaction lows used to define the demand line. A common error that new Wyckoff traders make in defining the over bought line is to use a top that comes before or after the two lows used to define the demand line. Making this error will result in a trend channel that is either too wide or too narrow. The purpose of the over bought line is to indicate where thrusts in the up trend are likely to end. Defining a trend that is too wide or too narrow can result in the trader looking for rallies to end higher than is likely or to close out positions at prices that are lower than necessary.

A down trend is defined by a supply line and an over sold line. The supply line connects the high points of two consecutive rallies of similar significance where the top of the second rally is at a lower level than the first/ Wyckoff would prefer that two consecutive lows that are both important points in the action be used to define the supply line. The most important points in the action are those that Wyckoff identifies as primary selling opportunities. The over sold line of a down trend is constructed parallel to the supply line through the low point of the reaction or decline that separates the two points used to define the supply line. Defining the over sold line through a point before or after the two points used to define the supply line will result in a distorted trend.

Normal trend development will have an up trend and a down trend or two trends pointing in the same direction separated by a horizontal trend or trading range. Trading ranges are defined by a support level and a resistance level. If a trading range is following an up trend, the resistance level will be defined first. If a trading range is following a down trend, the support level will be defined first. The resistance level of a trading range following an up trend is defined horizontally through the high point of the up trend that is being completed. The support level of this trading range is constructed parallel to the resistance level and passes through the low point of the reaction that follows the point used to define the resistance level. The trading range is confirmed by the rally that follows the low used to construct the support level if that rally respects the resistance level of the range. The support level of a trading range following a down trend is defined horizontally through the low point of the down trend being completed. The resistance level of this trading range is constructed parallel to the support level and passes through the high point of the rally that follows the point used to define the support level. This trading range is confirmed by the next reaction if that reaction does not make a lower low than the one used to define the support level.

Since the trend is the most important thing that any Wyckoff trader can know about the action of a market or an issue, defining the appropriate trend or trends for the time frame of the market operation that is being undertaken is the first thing that a trader should do each time an assessment of the action is made. A chart that does not have accurately defined trends drawn on it is unlikely to produce a profit for the trader. Without trend channels, it is not possible to identify buying or selling opportunities or to properly asses the progress of an existing position. The trend is your friend as long as you trade in harmony with it.

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