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Behind Trendlines

  • #1
  • First Post: Feb 17, 2010 11:29am Feb 17, 2010 11:29am
Trendlines as we know, act as a Linear regression model.

I would like to gather some brains here, to discuss and study on the causes of such linear regression.

Trendlines work 50%+ of the time, but is it caused by a self fulling effect? So the first two points could be considered random?

Too many traders trades off them, yet they don't have a clue as to what really is going on behind the charts to form these lines (including myself)...

Linear regression in a place where all players have different judgements and thoughts about the game? It just doesn't make sense to me...

I guess I could be asking for too much, but I really don't like the feeling of using something until I really know it well.

Good trading to all
Life is a school for the soul
  • #2
  • Feb 17, 2010 11:53am Feb 17, 2010 11:53am
Quoting esuffw
Trendlines as we know, act as a Linear regression model.

I would like to gather some brains here, to discuss and study on the causes of such linear regression.

Trendlines work 50%+ of the time, but is it caused by a self fulling effect? So the first two points could be considered random?

Too many traders trades off them, yet they don't have a clue as to what really is going on behind the charts to form these lines (including myself)...

Linear regression in a place where all players have different judgements and thoughts about the game?...
If you are referring to linear regression, its really just a mathematical observation the data points tend to revert to mean, much like moving average pullbacks. It is known that random data display such charateristics.

The other type of trendline that is being discussed about the most are the symmetry type of trendline where its uses are mostly to judge the "form" of the price movement. The applications are similar to chart patterns.
  • #3
  • Feb 17, 2010 2:21pm Feb 17, 2010 2:21pm
Trendlines require more skill to see than most people think. They can be somewhat distorted at times.
  • #4
  • Feb 17, 2010 3:35pm Feb 17, 2010 3:35pm
Quoting esuffw
Trendlines as we know, act as a Linear regression model.

I would like to gather some brains here, to discuss and study on the causes of such linear regression.

Trendlines work 50%+ of the time, but is it caused by a self fulling effect? So the first two points could be considered random?

Too many traders trades off them, yet they don't have a clue as to what really is going on behind the charts to form these lines (including myself)...

Linear regression in a place where all players have different judgements and thoughts about the game?...
well, i am a TL trader base solely on TL signals. i trade various pairs depending on which TL capture mine eye.

let the pictures do the talking instead

cheers to all TL traders~
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trade safe
  • #5
  • Edited 6:21pm Feb 17, 2010 5:20pm | Edited 6:21pm
Quoting Troikaone1
Trendlines require more skill to see than most people think. They can be somewhat distorted at times.
You're not kidding. I've arrived at dozens of ways to draw them, and only recently have I settled down to organize them into an approach.

It's nice to study the charts of those who've already gotten it together, such as the last post's.

I think of logarithms first, not linear regression, in terms of TL's or at least single-anchor multiple TL's. That's just me, though.
  • #6
  • Feb 17, 2010 6:21pm Feb 17, 2010 6:21pm
The problem with TLs is learning to draw the correct ones. You show a chart to 10 traders and you'll get 10 different sets of trendlines. One thing I've learnt is to not use a 1 pixel thin line but to use a nice fat line because the markets are rarely so accurate. Same for price levels (round numbers excepted). I have rough areas that I trade from on daily charts and will use this area to scale in.
The market reveals who we really are...
  • #7
  • Feb 17, 2010 6:48pm Feb 17, 2010 6:48pm
Linear regression is actually considered a "best fit" calculation, and is different from lines connecting tops or connecting bottoms....If drawing lines gives you an insight into likely turning points, by all means use the technique.
  • #8
  • Feb 17, 2010 10:12pm Feb 17, 2010 10:12pm
Sorry about the linear regression discussion. I think its not important anymore since I am starting to confuse some people.

What I really try to get at, is WHY they work, not HOW they work.

The only people who have the capacity to move prices are within the interbank system. If a TL did make a turning point, it shows that within the interbank system there is somebody or a group of people piling in market orders to turn the market sharply.

Surely the market makers would easily see huge amounts of liquidity sitting at these lines waiting for a reverse, therefore a liquidity hunt can easily be done? Are the big guys themselves using TLs to determine their entry and exit points???


WHY? More like, WHY are WE allowed to see them, yet they still works???

As I said before, I might be asking for too much answers......
Life is a school for the soul
  • #9
  • Feb 17, 2010 10:35pm Feb 17, 2010 10:35pm
The reason that trendlines, or anything else for that matter, "works" is because of shared transient perceptions. The vast majority of people buy because of a perception that they develop about price. Some people base their opinion on news, some on trendlines...you get the picture. Often times they have the same perception at about the same time.

I wouldn't worry about "liquidity hunts" or who uses what - just find out what works for you. There isn't too much of "why" that matters in this case...price is just based upon transient perceptions different people (regardless of account size) have.
  • #10
  • Feb 17, 2010 10:44pm Feb 17, 2010 10:44pm
Quoting Lionstrike
The reason that trendlines, or anything else for that matter, "works" is because of shared transient perceptions. The vast majority of people buy because of a perception that they develop about price. Some people base their opinion on news, some on trendlines...you get the picture. Often times they have the same perception at about the same time.

I wouldn't worry about "liquidity hunts" or who uses what - just find out what works for you. There isn't too much of "why" that matters in this case...price is just based upon transient perceptions...
So you're saying it is caused by a self fulfilling effect. (Well, everything on the market is in a way?)

I was actually thinking that some really big players trades with TLs, therefore causing the prices to reverse sharply. I am talking about Banks or even CB, to keep the prices within a controllable range. Correct me if I am wrong.
Life is a school for the soul
  • #11
  • Feb 17, 2010 10:48pm Feb 17, 2010 10:48pm
Quoting zz_zhang
well, i am a TL trader base solely on TL signals. i trade various pairs depending on which TL capture mine eye.

let the pictures do the talking instead

cheers to all TL traders~

Btw zz_zhang, thats some great insights. Hope it could help at least one person out with their TL drawings.
Life is a school for the soul
  • #12
  • Feb 17, 2010 10:50pm Feb 17, 2010 10:50pm
It's probably likely that banks are at least aware of technical levels. Whether or not they react to technical levels I can only guess...personally I just enjoy the volatility and the liquidity.
  • #13
  • Feb 17, 2010 11:09pm Feb 17, 2010 11:09pm
Quoting Lionstrike
It's probably likely that banks are at least aware of technical levels. Whether or not they react to technical levels I can only guess...personally I just enjoy the volatility and the liquidity.
If the big boys don't trade at these points, I am a little concerned about how price could MOVE in our favor after we took our reverse trade. As far as I know, the price is only determined by the interbank system and the people who can MOVE the prices are the interbank dealers. (Unless your broker decides to move the price within their own quotes.)

Every time when we take a reverse trade at a TL, as soon as we step into profit, we KNOW that someone big ( I mean really big.) within the interbank system is doing the same thing as us, and doing it aggressively with market orders. But this is only from my limited knowledge, I think I am wrong, thats why I am still asking for the answer.

Or maybe I should just enjoy and stop asking for so much answers...
Life is a school for the soul
  • #14
  • Feb 17, 2010 11:36pm Feb 17, 2010 11:36pm
Everyone "moves" the price, at least a little bit, when an order is filled. Moves that are sharper than others doesn't necessarily mean there are less participants, or even necessarily greater liquidity per participant, in the market.
  • #15
  • Feb 17, 2010 11:45pm Feb 17, 2010 11:45pm
Quoting Lionstrike
Everyone "moves" the price, at least a little bit, when an order is filled.
But us, as retails only affects the orders in our brokers. The quotes is determined by the interbank system.

So in a way, we cannot move the price since we are playing two different games of forex, but the interbank and the brokers DETERMINES our price when they are playing their game.

I feel retail forex is a bit like trading options for stocks. No matter how much you try to buy one option, the price in the underlying will not change (unless the market maker of the option wanted you dead.). Yet, the price of the option is determined solely on demand and supply of the underlying product...

Correct me if I am wrong.
Life is a school for the soul
  • #16
  • Edited Feb 18, 2010 12:08am Feb 17, 2010 11:52pm | Edited Feb 18, 2010 12:08am
Brokers participate with liquidity providers, banks and counterparties so your order aides in price discovery regardless of size. Quite different from options though, because there you are talking about two different instruments - a derivative and a security. But "retail forex" is not a different "instrument" than "interbank forex"; it's just there are more middlemen when you have a smaller account. That's just the cost of doing business. When you have a large enough account, you can go deal directly with the large banks and liquidity pools....The price feed from a broker should be quite similar to the feed from the interbank market. But if this is a concern you can get a composite feed for comparison...there are plenty of solutions, like the EBS/RBS FiX for instance.
  • #17
  • Feb 17, 2010 11:56pm Feb 17, 2010 11:56pm
Quoting esuffw
What I really try to get at, is WHY they work, not HOW they work.
You ask Why and How, but did you stop to ask WHAT is trend line doing?
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #18
  • Feb 18, 2010 12:18am Feb 18, 2010 12:18am
Quoting LasVahGoose
You ask Why and How, but did you stop to ask WHAT is trend line doing?
Please explain further about the WHAT. It seems I have missed this out in my thinking process.
Life is a school for the soul
  • #19
  • Feb 18, 2010 12:20am Feb 18, 2010 12:20am
Quoting Lionstrike
Brokers participate with liquidity providers, banks and counterparties so your order aides in price discovery regardless of size. Quite different from options though, because there you are talking about two different instruments - a derivative and a security. But "retail forex" is not a different "instrument" than "interbank forex"; it's just there are more middlemen when you have a smaller account. That's just the cost of doing business. When you have a large enough account, you can go deal directly with the large banks and liquidity pools....The...
So retail IS in the same game as the big players, but indirectly. I guess I was wrong. Thx for the correction Lionstrike
Life is a school for the soul
  • #20
  • Feb 22, 2010 4:09am Feb 22, 2010 4:09am
Just been through some TV news, some guy using trendlines.

One thing I realize, they often draw the supply trendline during a downtrend, and demand trendline during an uptrend. After some eye back testing, those are the ones that fail most of the time. Instead, use the countertrend trendline seems to give much higher % win ratio. After all, the higher the price, the harder the selling, so why are we focusing on the buying??? (Its basic demand and supply stuff.)

Anybody had the same thought here?
Life is a school for the soul
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