Best Thread All About Trendlines

[barjon]

I'm sure that all sorts of people look at all sorts of things. The point is whether or not they are all looking at the same thing. If they aren't, what difference does whatever they're looking at make?

And while I may agree that drawing trendlines is hardly advanced, after 15 years of doing this, I can tell you that you'd be surprised at some of the efforts I've seen.

Edit: Drawing back from the abyss of theory and philosophy, let's look at a chart.

At what points does this 40w (200d) SMA provide S or R to the Dow?

db

It doesn't. But, by the same token there's little to suggest S or R at the peaks and troughs of the reaction/retracement. There was, however, a fairly consistent dimunition of enthusiasm and If you draw in the trend line channel you'd be hard pressed not to think that it gave you a clue as to where S and R might be expected.

good trading

jon

 

[roguetrader]

And while I may agree that drawing trendlines is hardly advanced, after 15 years of doing this, I can tell you that you'd be surprised at some of the efforts I've seen.

Lol I can appreciate that, but I think there's enough money that knows how to draw a trendline.

Ok, first thing that I would say is that generally people who take an opportunity to point out how experienced they are or how long they have been doing something, either conciously or unconciously, are making the point that they have seen all the evidence and have made their decision. But that is fine, as a friend and mentor of mine would always say, "That's ok, it's your money not mine. You trade it whichever way you see fit."

Now with regard to your chart, at point 1. for 3 weeks the Dow fails to close below the 40ma resulting in a bounce, the bounce is quickly reversed and the subsequent failure of support results in an accelerated selloff. Moving to points 2 & 3 as old support becomes new resistance the stock has trouble remounting the MA. what would likely be more telling is how the stock reacted at these level on a daily basis. the importance of moving averages and trendlines for that matter, is not that they are buy and sell points but that they focus your attention to price and volume activity at that point and alert you to an event that may occur. For example if I am short DIA intra-day as it approaches the 50 day MA I am paying much closer attention to the tape and may lighten my position to lock in profit. Similarly if I am on the sidelines as it trades down to the same MA it will focus my attention for a long opportunity for a bounce. If I simply dismiss them as being of no consequence the I lose both the protection and the opportunities afforded by being aware of their significance.

 

[dbphoenix]

db

It doesn't. But, by the same token there's little to suggest S or R at the peaks and troughs of the reaction/retracement. There was, however, a fairly consistent dimunition of enthusiasm and If you draw in the trend line channel you'd be hard pressed not to think that it gave you a clue as to where S and R might be expected.

good trading

jon

Actually, Wyckoff would have no trouble at all finding S/R at the peaks and troughs. As to the "channel", perhaps, in hindsight. But I would be even harder-pressed to make a case that somebody bought because somebody else had drawn a line there.

 

[dbphoenix]

the importance of moving averages and trendlines for that matter, is not that they are buy and sell points but that they focus your attention to price and volume activity at that point and alert you to an event that may occur. .

The importance of S/R is as you say. The question is whether or not MAs and TLs provide it, and what you've said suggests only that you're looking in the wrong place.

The S/R are provide by those levels at which significant buying or selling has taken place. They are also those levels at which trading activity is most likely to occur. Since these levels are the same on every chart that displays price, no matter who creates it, no matter where he creates it, logically they are far more likely to ignite activity than a line drawn arbitrarily by a relatively few chartists. S/R can't be provided by lines that no one knows are there.

You can, of course, plot a 200d EMA in addition to the SMA. And a WMA. You can also plot a 150d, which many people do. Enough of these lines and you're bound to find a bounce somewhere. If, after all, these lines worked so well, MA XOs would be the Holy Graille.

 

[roguetrader]

The S/R are provide by those levels at which significant buying or selling has taken place. They are also those levels at which trading activity is most likely to occur. Since these levels are the same on every chart that displays price, no matter who creates it, no matter where he creates it, logically they are far more likely to ignite activity than a line drawn arbitrarily by a relatively few chartists. S/R can't be provided by lines that no one knows are there..

Hmmn perhaps I should change my nick to "Lines on charts do not provide support and resistance" I have already pointed out on more than one occaision that lines on charts do not provide support or resistance but that buying and selling does. These lines simply alert us to where this may occur.
We are both entrenched in our views on this subject and will simply have to agree to disagree, further debate on the subject between us will serve little purpose. Thank you for the good natured discussion.

 

[dbphoenix]

As is usual with this sort of topic, one invariably begins revisiting the same familiar territory, which is one reason why people write. Even though this involves a bit of grave-robbing, the following may be of interest, plucked from the old Price thread in General Chat:

. . . it's important to focus on what Magee calls the "territory" -- the reality -- rather than the map, i.e., our representation of that territory. The territory is prices paid. Our maps are our representations of it: MAs, Fib ratios, MACD, patterns, etc.

S/R are found where important buying/selling have taken place, important enough to have turned price. Therefore, the first place to look for S/R are those price points and/or price levels. Anything else is a representation, and that representation may have nothing to do with the reality.

What is considered 'important buying and selling' and how do I find them.

Important support and resistance levels can be found at those levels or zones in which a relatively large number of trades took place. These trades need not have occurred on only one occasion. In a base, for example, when "big money" is accumulating shares, these trades take place over an extended period of time over a narrow range of prices. Therefore, all told, many trades have taken place even though volume has been low.

Many trades can also occur in a broader range over a period of time which may be shorter or longer than an accumulative base. For example, if a given level is hit repeatedly and price is "supported" there by professional buying, that level becomes strong support, even though the number of shares traded during any one occurrence are not impressive.

Ditto all of this for resistance. There will be a level at which shares or contracts or whatever are repeatedly sold, though the reasons for the sales may be difficult if not impossible to determine. These sales can take place in a "zone of distribution". Or they can take place over time when a particular level is repeatedly tested.

Support and resistance, then, can be found in a swing point or the top or bottom of a reaction, but it is highly unlikely that the support or resistance found there will be important as it doesn't represent enough previous trades. In other words, there just aren't enough traders who care about it to make it important.

For the same reason, whatever support and resistance seem to be found with indicators or trendlines are most likely coincidental since these other lines don't represent previous trading activity. In fact, they're constantly moving.

The term "law of reciprocity" or "principle of reciprocity" is sometimes applied to the tendency of support to become resistance when it's penetrated, or vice-versa. However, "law" and "principle" are a bit high-toned to apply to this concept. There is nothing absolute about S/R. In fact, S/R can be quite soft. For example, if a given level is tested repeatedly as support, those holders who bought there may eventually begin to become concerned over these tests and over the fact that whatever they bought isn't going anywhere. Some of them may decide to sell some of all of whatever they bought if and when another test occurs. In this way, support fails.

Even "failure", however, may not be as important as first thought. S/R isn't, and need not be, rigid. In fact, it is quite flexible. A level or line can be penetrated to what seems to be an intolerable degree, but if price rebounds to that level or line and finds S/R there yet again, then that level or line can become even "stronger" (more impotant) than it was before, which is why it's better to think in terms of S/R "zones" than of specific prices.

S/R may, in fact, be too soft for some traders to fool with. However, if one understands that correctly-drawn S/R lines represent levels or zones in which a large number of trades took place, and that one can expect important action to take place at important S/R, he can then avoid wasting his time on relatively trivial trades and prepare himself to take advantage of more potentially profitable opportunities.

Here's to a worthwhile Friday

 

[roguetrader]

Alternatively,

http://Investing.typepad.com/canslim_investing/2004/05/support_resista.html

Alan S. Farley describes the role of both moving averages and trendlines in his book "The Master Swing Trader" and for those of you who learned their candlestick charting from Steve Nison you will find he refers to both moving averages and trendlines as support and resistance in his book "Japanese Candlestick Charting Techniques"

 

[TheBramble]

RT - I think you and dbp have pretty much have it covered with the 'battle of the books'.

Seems some can use TL (and even MA - at a stretch) to satisfactorily determine S&R in a manner appropriate to their trading style and expertise. Others cannot.

There's no right or wrong - just the ability to either utilise a market phenomenon - or not.

I doubt many who can press TL and MA into action as direct manifestations of S&R or as a proxy, do not necessarily exclude the 'standard' approach to defining and recognising S&R. I'm sure I don't. It does seem though that those of the opposing camp (standard definition only) find it difficult to accept the possibility of the alternative.

A prime example of 2 people seeing the same thing and being able to interpret it differently.

I really don't think it matters who believes what - there seems to be some fairly partisan lines being drawn up with quoted references to the 'big names' - both (all) of which of course are correct - for them - and for those that 'see' things the way they do.

To assume there is just one right way would be a vanity of rather limiting dimensions.

 

[dbphoenix]

Alternatively,

Alan S. Farley describes the role of both moving averages and trendlines in his book "The Master Swing Trader" and for those of you who learned their candlestick charting from Steve Nison you will find he refers to both moving averages and trendlines as support and resistance in his book "Japanese Candlestick Charting Techniques"

Then of course there's Fib, Gann, Wolfe, EW, pitchforks, fans . . .

I'll go with Spock

 

[roguetrader]

Hi Tony, agree totally with what you say, my purpose was simply to demonstrate that there is another school of thought on the use of these tools. For those who are established in their trading methods and do not view the use of these tools for this purpose worthwhile, fair play. But for those who are still searching for their niche then it is worth exploring.

 

[roguetrader]

Then of course there's Fib, Gann, Wolfe, EW, pitchforks, fans . . .

I'll go with Spock

Funny you should say that :cheesy: I am quite partial to Fib also. The others, not really to my taste, though I would not dismiss them based on the fact that I don't use them.

 

[dbphoenix]

There's no right or wrong
.

Quite true. I could provide a list of gurus as well, but to what purpose?

Two sides of an issue have been presented. That's the nature of debate. It's up to the newbie to determine what works for him.

 

[roberk]

Then of course there's Fib, Gann, Wolfe, EW, pitchforks, fans . . .

I'll go with Spock

And I still want to know which way to go if a black cat crosses my path. :-0

 

[TheBramble]

Hi Tony, agree totally with what you say, my purpose was simply to demonstrate that there is another school of thought on the use of these tools.

That's exactly what I believed you were doing RT and IMVHO is an attitude and task essential as a trader (or anything for that matter) to consider in any undertaking.

If I've not been clear in a previous post, it would seem Farley's and Nison's views are in line with my view on this subject. I bet they're relieved. (I've not read Farley's work as I understand many who attempt such a task rapidly lose the will to live...)

For those who are established in their trading methods and do not view the use of these tools for this purpose worthwhile, fair play. But for those who are still searching for their niche then it is worth exploring.

I would suggest that any 'established in their trading' (i.e. trading successfully for a while) it is precisely because they have maintained an open mind and are constantly researching that they have achieved this position.

Of course, having researched and studied does not necessarily imply acceptance and utilisation. We can always choose what to use and what to discard.

 

[barjon]

Here's a way to combine both lines of thought.

Using an exploded view of the DJI retracement as an example. The first chart shows an intial channel with a resistance (supply) line drawn from the high and first peak with a support (demand) line drawn parallel to it. The horizontal lines are previous S & R. The resultant triangles (coloured yellow) represent the zone where you might expect to find S&R occuring and you'd be keeping a close eye on the action for clues.

The second chart redraws the channel to take account of the high of the next peak then determines next zones.

A viable compromise :?:

good trading

jon