Trendlines!! Liars or Not

[Attila 10]

Sooooo... What next???

[Tams 20]

there are many ways to draw trendlines...

 

the most popular way is the Geometric Method.

 

you simply take the extreme points of the price oscillations and join them with a straight line.

 

 

another method incorporates the volume of the bars...

(this method is applicable only to chart resolutions where volume histogram can be charted).

 

you would draw an up-trendline only if there is an increasing volume to accompany the upward movement.

 

same for the down-trendline.

[Tams 20]

some people draw a trendline religiously... with laser-sharp precision.

while others would hold a trendline even if the price is penetrated, but did not close outside of the trendline.

[Attila 10]

The problem I have is the "need to know" and Trendlines frequently take me in to trades getting in front of momentum. Needing to know leads to predictions. I shorted earlier today AS price reached the trendline so a really tough trade as I did not even remember ti wait for failure.. Some say hard trades are good ones but I needlessly make them hard a lot.

 

Trendlines should be used to get into trades (faded when they contain price) following the trend and not much else.. Breaks and retouches are very hard to play for me.. About 20pips green in the trade now..

[NeoTrader 10]

I'm not sure how you trade obviously, but perhaps using the trendline in conjuction with a support or resistance level as well as some other confirmation. Purely trading off a trendline in my humble opinion is pretty brave.

 

[Bohica 10]

Trendlines are an integral part of trading. They can determine so much. Obviously they show you the trend but on top of that they show you the current support and resistance. Helpful in determining when to enter and exit trades. Additionally when coupled with a few indicators can be extremely powerful.

 

This video is a great example of how to properly use trendlines.

 

[neoikon 10]

I tend to see people make trend lines fit too perfectly, which takes away valuable information from the chart.

 

One technique that I use, that I haven't seen anyone else use, is very similar to the "geometric method" but without forcing everything to fit. In other words, let the breaking of that trend line tell you something.

 

 

In a down trend, I extend a trend line from two high pivots (A and B on the chart). I then copy that line to the lowest price between those two points (point C). Most people would extend it from point D, I'd imagine, since it would fit better. However, as all the blue arrows indicate, the line extended from point C worked out better as a trend line/resistance line.

 

(This isn't the best example, since point E occurred, breaking the high of point A. There wasn't a very good pullback after point E to make a very good drawing. But, this is live data from today, so I take what I can get. )

 

However, what is valuable is the fall after point E broke below the bottom trend line, which is an unsustainable rate of falling. This tells you the market wants to pullback to one of the two trend lines, which it did.

 

 

The same thing happened in the above chart. I drew the line from A to B, then copied it to the lowest price between those two points, point C. The market fell below the lower trend line (point D), indicating exhaustion, then a return to one of the trend lines.

 

Of course, there isn't any explicit trade setups using this method of trend line drawing, but the subject of this thread was more of "liars or not". I say "not". However, if you are going with the trend and are shorting a pullback, I would feel more strongly if my setup happened at one of these trend lines, than between. OR, if you are looking for a counter-trend setup, it helps if that bottom trend line was broken, because it could help a counter-trend pop to happen (as in the second chart).

 

As an aside, I am a strong believer in tick-based charts when drawing trend lines. In these charts I am using a 1597T chart on the ES. What that means is that if there is high volume, more bars are drawn, low volume, less bars are drawn. During low-volume times, such as the overnight session, it paints the chart in a much easier to understand way compared to time-based charts (5-min, 15min, etc), IMHO.

 

 

Above is a ES, weekly chart. Same thing, but a long case. Connected A to B, copied to the highest price between A and B at point C. After breaking above the top line, we traded in an unsustainable rate, leading to exhaustion, leading to a return to norm (point D). Also, note point E was nice resistance.

 

 

Daniel

neoToolbox.com

[neoikon 10]

Looking at the poster's original chart (Euro, 4 hour chart), I see something interesting, using the method described in my last post. When that line was originally draw from point C, it didn't look very interesting. Ultimately, it looks like the market did care about it.

 

[ake 10]

  Attila said:

Trendlines should be used to get into trades (faded when they contain price) following the trend and not much else..

 

Strong statement.

 

If you had a fondness for trading reactions and rallies in a trend you might find trendlines useful to determine direction in the higher timeframe, then trade the lower timeframe only in that direction.

 

You could use the break of a trend line across the highs of the reaction or the lows of the rally as a trigger to enter.

 

You might even draw a channel line (parallel to the trend line) along the higher highs of the trend and consider a price excursion past the channel line as overbought and due for a correction, then trade for a return to the mean.

 

Good trading!

[Attila 10]

Noekin... wow more subjectivity to drawing them!.. I am starting to think on a long-term basis like my chart those trendlines are more dangerous than useful as the fundamental events that drive prices cause ebbs and flows I doubt care to respect a trendline.. Now between events (dailies, 4 Hr charts) trendlines a lot more useful..

 

Price levels on the other hand many magnitudes as useful..

[neoikon 10]

  Attila said:

Noekin... wow more subjectivity to drawing them!.. I am starting to think on a long-term basis like my chart those trendlines are more dangerous than useful as the fundamental events that drive prices cause ebbs and flows I doubt care to respect a trendline.. Now between events (dailies, 4 Hr charts) trendlines a lot more useful..

 

Price levels on the other hand many magnitudes as useful..

 

RE: Subjectivity. Generally, it's the first pullback after a major peak. Or, wave 1 and wave 2, if you are into Elliot Wave. For me, it's a logical way of drawing the other side of the channel based on a trend line.

 

Another way to think of a trend line is through symmetry. If the next pullback is based on symmetry of the last pullback, that naturally causes a "trend line".

 

The tricky thing about fundamental events is that any personal decision about what a fundamental event SHOULD do to the market doesn't necessarily make it so. In the end, you have to rely on what the market actually does in reaction to that fundamental event. Which means going back to reading the chart. It's amazing how technical the ES stays even when there is a major fundamental event such as the fed rate decision.

 

Stay thirsty, my friends.

[joshdance 10]

  neoikon said:

Looking at the poster's original chart (Euro, 4 hour chart), I see something interesting, using the method described in my last post. When that line was originally draw from point C, it didn't look very interesting. Ultimately, it looks like the market did care about it.

 

 

If anybody else comprising "the market" actually drew that trendline, and kept it there, and traded off of it, they'd be out of their minds. In other words, there's not a snowball's chance in hell that sellers sold there because of that line, IMHO. Trendlines are quite subjective anyway, but that's about as random a point to pick as you could find.

 

I do find the value in using lines and channels, in fact much of my trading is based off of that, but you can draw a random line anywhere, and find where price touches it. Best to stick to the lines IMO that are obvious to a blind person from 10 feet across the room.

[JEHs 10]

It's like anything else, trendlines, action/reaction lines, chanel lines, pitchforks, whatever... they all work and they all don't. I would venture to say that a good percentage of us draw lines on our charts that approximate the angles of the trends or ledges or flags, but most of us don't necessarily "trade off them" exclusively. I would say even if we don't draw the lines we still see them on the chart...

[Bohica 10]

Trendlines are essential. Yes I am sure that we can all see the trend and what not but when you get a nice parallel trend it makes trading so much easier. A great example is below, I hunt for these everyday.