FAO: TBS Re: Trendlines

[FTSE Beater]

Sorry Mark, but this is completely wrong.

A trendline requires two points (not three) the first point should be a reaction low if looking at a bull trend or a reaction high if looking at a bear trend.

The second point is ideally a second reaction high or low, but not necessarily, it may also be a level of support or resistance.

This is used particularly on breakouts, when the price charges up (or down) at an unprecidented and unsustainable rate (and thus is more likely to retrace than anything else). In this situation the trendline is linked from the high or low to a point along the broken support or resistance level, in line with the price action. The reamina like this until a second more established point is made.

Trendlines do not 'work' because 'everyone sees them', I've never read such rubbish!

They are an ever-changing level of support or resistance, points at which the buying pressure or selling pressure is sufficient to hold the price action - giving you your next points in the trend, not the other way around.

Hi TBS

I thought I would start a new thread for this, as I wanted to keep the Basics of Trading thread, directly related to the subject.

First of all, as you know, I have the greatest respect for you as both a trader and a teacher. I think this confusion has come about, because I haven't explained myself properly, and I'm more than happy to amend my original post in any way to make it clearer.

With regards a trendline having 2 points. I fully understand what you are saying, but what good is a trendline if it isn’t tested.

This would be a valid trendline if it got hit. The idea is that price should reverse if it tests the trendline again. Correct?

If the price doesn’t stop at this trendline, then I would call it invalid. I wouldn’t necessarily expect it to fall faster.

Trendlines do not 'work' because 'everyone sees them', I've never read such rubbish!

I can’t think of any other way of explaining it. If no-one saw price support at a certain level, then it wouldn’t reverse, the support value becomes just another number.

I hope I’ve explained what I meant a bit better, and I welcome any further comments you have

 

[neil]

trend lines

This is where problems arise relating to a persons definition of a trend line.

Myself, I would have drawn the second point at the low ( about 120 )immediately preceding the high ( about 160 ) on this chart
as per the guidelines given by Vic Sperandeo ( Trader Vic......
" Principles of professional speculation."

A down trend line would now also be drawn from the highest high to the high ( about 150 ) immediately preceeding the lowest low ( about 100 ). So the price is now moving across to the underside of the down trend line.

But I bet someone else draws them differently.

Any road...you're doing a great job.

 

[iSquared]

When defining a trend line I think it is important to realise what it is trying to represent. In effect it is close to a measurement of the rate of change (of sentiment/prices) displaced by the extreme swings in sentiment from the 'trend'. As such it is stronger if tested (as it confirms the continuing rate of change) but ultimately it only requires two points to draw it. Both swing points and congestion areas are valid IMO as they both represent different manifestations of the rate of change in the demand/supply relationship.

Ah daughter nagging ... have to dash. Probably good stops me waffling on.

 

[Skimbleshanks]

Little boys use trendlines which join points and are at an angle.
Big boys use horizontal lines.

 

[Mr. Charts]

"Little boys use trendlines which join points and are at an angle. Big boys use horizontal lines."

Is that an extract from, "The Deconstruction of Sexism in Technical Analysis in Anglo-Saxon Societies" by M. Jacques Derrida"?

 

[oatman]

You can draw trendlines wherever you want (3 points please) and you could use Indexia 1/3 2/3 Speed Lines which take YOU out of the equation, and give objective support/resistance lines.

 

[neil]

Variety

If you like sloping trend lines...use them.

If horizontal rings your bell...do so.

But can we get back on track re the merits or otherwise of trend lines and/or techniques of drawing same.

And leave sarcasm at the door.

 

[mmillar]

Little boys use trendlines which join points and are at an angle.
Big boys use horizontal lines.

And girls go shopping.

 

[Skimbleshanks]

Well of course us girlies can afford to go shopping because we're so successful in our trading.

For those who obviously don't understand the accepted terminology, little boys are the retail players and big boys are the institutions.

 

[Mr. Charts]

Miaoow ;-)

 

[neil]

 

[Wideboy]

So Skim, would you call yourself a little boy or big boy

 

[DaveJB]

Well,
that makes me a very little boy - and I wouldn't copy an institution, I don't have that much money to waste... my vote is for 3 points, it's a bit like hearing 'those two birds are flying in formation'... you can draw a straight line between any 2 points you like, it's when three points line up that you can start claiming it's non-random.
I think TBS has a valid poitn regarding people seeing the lines - they show the temporary rate of change of sentiment in the supply/demand battle (my way of looking at it) but you DO have a point... if they're fairly obvious then people do trade them. In Burke's P&F book near the back he talks about stops, and one example used is to base the stop on a support line... Now that's because - presumably - breach of that line tells him that supply has overcome demand, the status quo just went, and there's no telling yet where the balance will be struck but the stop, and subsequent trade, are based on seeing a line on a chart.
Many people look for S/R and assume they will hold, at least for a while, others wait for a breach to occur - I'd say FTSE just put into simple English an easy way to look at crowd psychology.
Dave

 

[Mr. Charts]

Remember the more often a support/resistance line is hit, the more likely it is to fail, especially if the retracements are of smaller amplitude.
You need to think this through in terms of trader psychology to gain an understanding of why.

 

[Skimbleshanks]

Sorry not to have replied earlier Wideboy - I was out shopping

I wouldn't call myself either, although it's often been suggested that I should be in an institution.

 

[FTSE Beater]

Remember the more often a support/resistance line is hit, the more likely it is to fail, especially if the retracements are of smaller amplitude.

Hi Mr.Charts

It took me ages to work that one out!! All the textbooks, say the more a price level is tested, the stronger it is.

 

[Mr. Charts]

ftse-b,
This is one of the .gifs I use in my coaching sessions to illustrate high probability patterns.
You can see the way resistance was repeatedly hit at 56.50, before giving way. Each time the retracement was of smaller amplitude indicating stronger buying pressure from progressively higher levels.

 

[Mr. Charts]

ftse-b,
Here's one without annotation showing the repeated tests of 37 support breaking after diminishing retracements.
Lots of other lovely patterns to trade on both these charts, but let's keep it simple.
Hope that helps,
Richard

 

[iSquared]

So in this case (Mr Charts example) although there is clear R the supply runs out at increasingly higher prices to form the ascending triangle bounded by the horizontal line.

(... and as I can't resist it was one fo the early entry patterns the failure to fill the gap? Can't see the second unless it is the three white bars. Later on R becomes support as the breakout is tested ...)

I can see why horizontal lines are easier to trade - much easier to define. In effect you either have a range you can trade or a breakout whereas a break of a 'swing point trend line' just indicates a change in the rate of change (it could be entering a range/consolidation or just be going up/down a bit more slowly until the price moves past the previos swing point - in effect a horizontal line confirmation). Must re-read Darvas ;-)

Cheers,

Andrew

 

[Mr. Charts]

ftse-b,
Just read your post of 7.2.03 6.26pm
May I suggest you are careful about using the extremities of bars as pivots. If only one trade was done at c83 at the first pivot and
c100 at the second pivot, which is very possible with SETS, the whole basis of the trend is based on minimal trading at those extremes. If you must use daily candles, at least check out 30 minute candles too so you get a better idea of where trading really did take place. That should confirm or nullify the daily candle.
Generally you are better to use the bottom of the candle body rather than the bottom of the wick to draw trend lines.
BTW, a nice head and shoulders on that BAY chart isn't there? ;-)

As for the debate between two points and three points, that's dead simple. Two points have some validity if the second point proves to be a pivot, ie a point of price rejection.
Three points have rather more validity.
Richard