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Drawing a Trendline

  • #1
  • First Post: Sep 10, 2007 7:06am Sep 10, 2007 7:06am
I suspect this won't change many minds but I'll feel better for saying it: If you draw a trendline between 2 points only...it is meaningless!

Wikipedia as well as other mathematical sources define a line as:

A line can be described as an ideal zero-width, infinitely long, perfectly straight curve (the term curve in mathematics includes "straight curves") containing an infinite number of points. In Euclidean geometry, exactly one line can be found that passes through any two points. The line provides the shortest connection between the points.

In other words, a line connects two points. Connecting two points in space does not bestow upon you some magical powers for predicting a third intersection, it's just a line, no different than the ones you learned back in the days of crayons and diapers. Ever wonder why your lines are broken all the time? It was probably because they were useless to start with.

The addition of a third or more points starts to increase the validity of a line and you just might be on to something that is statistically valid. The more times that your line is tested and proven, the stronger it becomes and the more confident you can be about your trend-based trading decisions.
  • #2
  • Sep 10, 2007 7:25am Sep 10, 2007 7:25am
I'd like to add to this: the more obvious/notorious the peaks to join with the trendline, the more valid becomes as more traders will be seeing that very same trendline and draw them in their respective charts.
  • #3
  • Sep 10, 2007 7:28am Sep 10, 2007 7:28am
Thanks WTB. That is a very important point that I neglected to mention.
  • #4
  • Sep 10, 2007 7:31am Sep 10, 2007 7:31am
Can't wait for this to develop. I don't do TLs at the moment, as I never really found a consensus on the right way to do it. DeMark's way seemed to offer hope but in the end his own caveats regarding using his method for FX sowed seeds of doubt.

Bring it on, Phil
  • #5
  • Sep 10, 2007 7:33am Sep 10, 2007 7:33am
yep i very much agree

about a year ago i started noticing that drawing a trendline using 2 points is basically like guessing. u cant trade based on it. so eventually i realized that if i find 3 or more points then the next time price gets near the trendline i can expect some action. so all i have to do is watch price around the next encounter ((combine that with ur own system/method/more confirmation)) and more often than not you've got urself a good risk reward trading opportunity.

the example im gonna post is not exactly a trendline on price but its a trendline on a 50 cci. i prefer drawing my trendlines on a cci or rsi. but u can see the 3 points i used (the second point spiked a bit). the way i trade this is, i draw my trendlines on the 1h then i leave the same lines and go to the 30 min and the 15 min and i trade the reactions.

for example if the cci is under my descending trendline then i go to the 30 min and that could be riding the line. at that point my bias is still down so i go to the 15 min and that could have crossed up my descending trendline. so here i want for the 15 min to cross back down and i take my short position. its alot of probabilities as well as picking better entries while having more confirmation using the smaller timeframes
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  • #6
  • Sep 10, 2007 10:23am Sep 10, 2007 10:23am
I'm an active DeMark TL user on chart PA since reading his book moons ago. AND my favorite place to place standard trend lines is on the RSI indicator window.

: ) Thom
  • #7
  • Sep 10, 2007 11:00am Sep 10, 2007 11:00am
As a chronic abuser of the term trendline I will say that on the whole, formally, I agree re. a true trendline needing 3 or more touch points to define a trend. However this doesn't discount the use of two-only touch point lines, though those need to be backed up by other studies, or reframing one's hypothesis in terms of the likelihood of a trendline forming, given the two points.
  • #8
  • Edited 11:20am Sep 10, 2007 11:18am | Edited 11:20am
Quoting WTB
I'd like to add to this: the more obvious/notorious the peaks to join with the trendline, the more valid becomes as more traders will be seeing that very same trendline and draw them in their respective charts.
I think that should be the first think taught about TLs
  • #9
  • Sep 11, 2007 1:05am Sep 11, 2007 1:05am
Quoting PeterFM
I don't do TLs at the moment, as I never really found a consensus on the right way to do it.

Which is exactly why they don't really work. Those lines we are drawing are imaginary, nobody sees them. So if we cannot agree on them most of the time - assuming that "we" are part of the self-fulfilling speculative influence on the market - then why the hell will they be obeyed? The bigger the consensus on anything (including a particular clear TL) the better it is to trade. Once you get confused however, you can bet all your money that others are confused as well.
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #10
  • Sep 12, 2007 1:04pm Sep 12, 2007 1:04pm
here is my philosophy:

they measure the size and magnitude of a reaction.. if the reaction remains the same after each rally the trend is still intact, but if a reaction is larger than usual a trendline will be broken and therefore a reversal could be in place..


that is where i find the logic in trendlines
  • #11
  • Sep 12, 2007 1:38pm Sep 12, 2007 1:38pm
Quoting superdezign
here is my philosophy:

they measure the size and magnitude of a reaction.. if the reaction remains the same after each rally the trend is still intact, but if a reaction is larger than usual a trendline will be broken and therefore a reversal could be in place..


that is where i find the logic in trendlines
Could you please provide an example? After reading this a couple times I still can't follow your logic (my fault, not yours).

Welcome to 1KT.
  • #12
  • Sep 12, 2007 1:47pm Sep 12, 2007 1:47pm
Quoting philmcgrew
Could you please provide an example? After reading this a couple times I still can't follow your logic (my fault, not yours).

Welcome to 1KT.
take a look at the picture i attached

when there is a reaction after a rally and price begins to decline what normally happens is the traders who were short find an opportunity to liquidate their shorts and admit they were wrong, the people who were long find it to be a good opportunity to double up and the traders who were on the sidelines have a nice entry point to hop on and catch some of the trend in progress..

now, when the reaction is abnormally large and there is strong selling, what i just described above did not occur and the trend in a sense is weak or some might call it "unhealthy".. Either the traders who were short did not liquidate for one reason or another, or the traders who were long liquidate their positions because of a change in the fundamentals or the traders who were on the sidelines found a reason to short the market. And, just like every indicator/method.. this works everytime, EXCEPT for when it doesnt

That is where i find logic in trendlines, I hope this cleared things up for you. And thank you for the warm welcome aboard 1kt! I look forward to contributing to some of the wonderful discussions this group has.

Dave
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  • #13
  • Sep 12, 2007 1:50pm Sep 12, 2007 1:50pm
Quoting superdezign
take a look at the picture i attached
Thanks Dave.
  • #14
  • Sep 15, 2007 4:39pm Sep 15, 2007 4:39pm
Finally had a chance to get back to John J. Murphy's book (Technical Analysis in the Financial Markets) which is pretty definitive. Re trendlines, several important points - they are drawn off the highs & lows (not opens & closes); with only two points they should be considered as tentative trendlines,it is considered confirmed only if the price has retraced 50% or so of the reaction high/low between the two touch points (some use stronger requirements); a third touch point is required to consider the trendline as a valid trendline.
  • #15
  • Last Post: Sep 15, 2007 4:59pm Sep 15, 2007 4:59pm
Quoting HalifaxCB
Finally had a chance to get back to John J. Murphy's book (Technical Analysis in the Financial Markets) which is pretty definitive. Re trendlines, several important points - they are drawn off the highs & lows (not opens & closes); with only two points they should be considered as tentative trendlines,it is considered confirmed only if the price has retraced 50% or so of the reaction high/low between the two touch points (some use stronger requirements); a third touch point is required to consider the trendline as a valid trendline.
Thanks for looking that up. I have that book and read it years ago but I never thought about looking there. Those are all great points and hopefully that clears up a few misconeptions.
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