Trendlines
The most important feature of a trendline is its angle - it identifies the dominant market force.
Most chartists draw a trendline extreme high and low points, but it is better to draw it through the edges of congestion area. Those edges show where the majority of the trades have reversed direction.
When the trendline is broken, it gives the first signal of a trend change. The second signal is given when the price retest the recent high and back away from it. The third signal occurs when the prices break through the previous minor low. It confirms that the uptrend has reversed. A mirror image of this method applies to downtrends.
Rating trendlines
You can rate the importance of any trendline by examining five factors: the time frame of the trendline, its length, the number of times price touch it, its angle and volume (for stocks)
The longer the time frame, the more important the trendline. A trendline on a weekly chart identifies a more important trend than a daily trendline and so on...
The longer the trendline, the more valid it is.
The more the contacts between the prices and the trendline, the more valid that line.
The angle between a trendline and the horizontal axis reflects the emotional intensity of the dominant market crowd. The shallow trendline is likely to last longer.
Sometimes prices accelerate away from trendline. Then you can draw a new, steeper trendline. It shows that a trend is speeding up, becoming unsustainable. When you draw a new steeper trendline, tighten your stop, place it immediately below latest trendline and adjust that stop every new bar. The breaking of a steep trendline is usually followed by a sharp reversal.
Trendline breaks
The breaking of a well-established trendline shows that the dominant market crowd has lost its power. You have to be careful not to anticipate trading signal - most traders lose money when they jump the gun.
A trendline is not a glass floor under the market - one crack and it is gone. It is more like a fence that bulls or bears can lean on. They can even violate it a bit without toppling it, the way animals shake a fence. A trendline break is valid only if prices close on the other side of a trendline. Some traders insists that a trendline has to be penetrated by two or three percentage points of price.
After a very steep uptrend is broken, prices often rally again, retest their old high, and touch their old uptrendline from below. When that happens, you have a near-perfect shorting opportunity: a combination of a double top, a pullback to an old trendline and perhaps a brearish divergence from technical indicators.
The reverse also applies to downtrends.
Trading rules:
1. Trade in the direction of the slope of a trendline. If it points up, look for buying opportunities and avoid shorting. When the slope is down, trade from the short side and avoid buying.
2. A trendline provides support or resistance. When price rise, place a buy order at the uptrendline and protective stops below. Reverse the procedure in downtrends.
3. Steep trendlines precede sharp breaks. If a trendline is steeper than 45 degrees, place your stop right at the trendline and adjust it daily.
4. Prices often retest their latest extreme after breaking a steep trendline. A pullback rally to an old high on falling volume and with indicator divergences provide an excellent shorting opportunity. A decline to older low after a downtrend is broken provides a low-risk buying opportunity.
5. Draw a channel line parallel to a trendline and use it as a target for profit taking.
Trendline Channels
A channel line marks the area of bulls' maximum power in an uptrend and bears' maximum power in a downtrend. The wider the channel, the stronger the trend. It pays to trade in the direction of the channel 's slope, going long in the lower quarter or half of the rising channel and selling in the upper quarter or half of the falling channel. Profits should be taken at the opposite channel wall.
A preliminary trendline
Normally, a trendline touches at least two points on a chart. There is a little known technique for drawing a preliminary trendline through only one point.
When the price breaks their downtrend and rally above it, you can assume that the downtrend has ended and new uptrend may begin. Connect the two latest peaks - this is the channel of the new uptrend. Draw a line parallel to it through the latest low. This preliminary uptrend, drawn parallel to a channel line, tells you where to expect next bottom. It often points to excellent buying opportunities. This procedure tends to work better at bottom than at the tops.
Trendlines can also be applied to indicators. Among technical indicators, the Relative Strength Index is especially well suited for trend analysis. It often breaks its trendline in advance of prices, providing an early warning of a trend change.
The most important feature of a trendline is its angle - it identifies the dominant market force.
Most chartists draw a trendline extreme high and low points, but it is better to draw it through the edges of congestion area. Those edges show where the majority of the trades have reversed direction.
When the trendline is broken, it gives the first signal of a trend change. The second signal is given when the price retest the recent high and back away from it. The third signal occurs when the prices break through the previous minor low. It confirms that the uptrend has reversed. A mirror image of this method applies to downtrends.
Rating trendlines
You can rate the importance of any trendline by examining five factors: the time frame of the trendline, its length, the number of times price touch it, its angle and volume (for stocks)
The longer the time frame, the more important the trendline. A trendline on a weekly chart identifies a more important trend than a daily trendline and so on...
The longer the trendline, the more valid it is.
The more the contacts between the prices and the trendline, the more valid that line.
The angle between a trendline and the horizontal axis reflects the emotional intensity of the dominant market crowd. The shallow trendline is likely to last longer.
Sometimes prices accelerate away from trendline. Then you can draw a new, steeper trendline. It shows that a trend is speeding up, becoming unsustainable. When you draw a new steeper trendline, tighten your stop, place it immediately below latest trendline and adjust that stop every new bar. The breaking of a steep trendline is usually followed by a sharp reversal.
Trendline breaks
The breaking of a well-established trendline shows that the dominant market crowd has lost its power. You have to be careful not to anticipate trading signal - most traders lose money when they jump the gun.
A trendline is not a glass floor under the market - one crack and it is gone. It is more like a fence that bulls or bears can lean on. They can even violate it a bit without toppling it, the way animals shake a fence. A trendline break is valid only if prices close on the other side of a trendline. Some traders insists that a trendline has to be penetrated by two or three percentage points of price.
After a very steep uptrend is broken, prices often rally again, retest their old high, and touch their old uptrendline from below. When that happens, you have a near-perfect shorting opportunity: a combination of a double top, a pullback to an old trendline and perhaps a brearish divergence from technical indicators.
The reverse also applies to downtrends.
Trading rules:
1. Trade in the direction of the slope of a trendline. If it points up, look for buying opportunities and avoid shorting. When the slope is down, trade from the short side and avoid buying.
2. A trendline provides support or resistance. When price rise, place a buy order at the uptrendline and protective stops below. Reverse the procedure in downtrends.
3. Steep trendlines precede sharp breaks. If a trendline is steeper than 45 degrees, place your stop right at the trendline and adjust it daily.
4. Prices often retest their latest extreme after breaking a steep trendline. A pullback rally to an old high on falling volume and with indicator divergences provide an excellent shorting opportunity. A decline to older low after a downtrend is broken provides a low-risk buying opportunity.
5. Draw a channel line parallel to a trendline and use it as a target for profit taking.
Trendline Channels
A channel line marks the area of bulls' maximum power in an uptrend and bears' maximum power in a downtrend. The wider the channel, the stronger the trend. It pays to trade in the direction of the channel 's slope, going long in the lower quarter or half of the rising channel and selling in the upper quarter or half of the falling channel. Profits should be taken at the opposite channel wall.
A preliminary trendline
Normally, a trendline touches at least two points on a chart. There is a little known technique for drawing a preliminary trendline through only one point.
When the price breaks their downtrend and rally above it, you can assume that the downtrend has ended and new uptrend may begin. Connect the two latest peaks - this is the channel of the new uptrend. Draw a line parallel to it through the latest low. This preliminary uptrend, drawn parallel to a channel line, tells you where to expect next bottom. It often points to excellent buying opportunities. This procedure tends to work better at bottom than at the tops.
Trendlines can also be applied to indicators. Among technical indicators, the Relative Strength Index is especially well suited for trend analysis. It often breaks its trendline in advance of prices, providing an early warning of a trend change.
No comments:
Post a Comment