Why does trendline work?

Hello

Below are two sample pictures of a price chart with a trendline. You can see that once a trendline is drawn usually (with high enough probability of occurrence) we see that price reacts to the trendline sometime in the future. I want to know the reason behind this? Does tendline work because inst. traders use them or there are psychological reasons or ... ?

Any advice is welcome.

http://www.uploadimage.co.uk/images/...5468894735.gif

http://www.uploadimage.co.uk/images/...7032640573.gif

To me it is some sorts supply demand or can say support resistances interaction resultant line as can run in a horizontal level also run in a oblique level. continued increased or decreased supply/support maintain at a trendline but not neccesarry it will maintain all in one line oblique one as mentioned here , may even fall from the line intially run , breakout but got support/supply or resistance demand at some low level & trend again continue & line changed by this time , deviated from previous one . so till a particular supply or demand or resistance -demand is maintained the trend follow in a particulay oblique line , generally call a trendine .so trendline can be at any angle from the horizontal base depending upon the factors mentioned above depending upon the strength of supply or demand..

thanks ,
fontu

It's the same with fibs, if enough people are watching the same levels the market will react, self fulfilling prophecy.
The real trick is knowing where to place your trendlines and what timeframes matter most.

The market may have some perception of fair price around a given value, however joining the dots as in trend lines is nothing more than drawing pretty pictures.
To put it on a probabilistic basis, how many points could you have joined up on your charts that had no perceived significance?
What separates the significant points from the dud ones (apart from hind site)?

No, it doesn't work! Really.
No edge can be extracted from TL or support and resistance. Great on history chart; useless on future. period.

don't believe me? well.. it's your money

happy new year.

Trendlines work for support and resistance, but you have to draw them correctly! Don't let anyone sway you one way or the other, look into these tools from source material and investigate yourself. I would recommend alan andrew's work....

Just because you can't extract pips from S/R dosen't mean other people can't.

just because I was registered on dec 2007 doesn't mean cuz that is the date when I begun trading.
Believe me, I have a ton of experience and I know what works and not. And as you can see, I don't have tons of posts because i'm not wasting my time on forums, i'm a trader.


but as i said, it's not my money. so the decision is yours, i just tried to help.
Go ahead.

Before I made my post above I had no idea when you registered, how many posts you had or any thing else about you. The fact is just because you cant use S/R,dosent mean other people cant.

Thanks for the help, but I do make money trading S/R.

I suggest, before you make any more posts, dont be so damn cock sure that your way is the only way.

My basic understanding is you are either buying strenghth(up trend ) or selling weakness( down trend ).So my view is a trendline is more of a technical tool for measurement to manage your trade with. You simply want to trade in the overall direction of price and use a trendline to maintain that your trade has direction continuing to outpace volatility.

The trendline is just a product of continued buying or selling and any powerful trend can consolidate and experience corrections,and break the trend line many times before continuing in its overall path.

From what i've read and studied i'd put it down to more of a psychological aspect than anything else. There's no real reason or mathematical equation for why they work, if they're placed in the right place, they just do. Obviously they're not concrete otherwise a trend would form and never break from it.

It's interesting to see a trend line that has been acting as support then turn into resistance upon the chart breaking through it.

to all of you


have a look at shabs post above. he sums it up nicely .....that is the truth.

Thanks for your advice.
Could you please explain more about "knowing where to place a trendline"?

As I know trendline is drawn by connecting consecutive highs/lows. And if the trader has a sound definition for high/low then there can only be one active trendline in any given chart.

i think you answered your own question. trendline works because we human can only perceive 2 dimensional things very easily, and most traders are 2 dimensional. therefore it works, if all of sudden we all reach enlightenment and see the chart as three dimensional, then trend BOX will work if you will.

when it works, it works as self fulfilling prophecy
when it doesn't work - it doesn't as it takes only one trader that thinks otherwise and has enough power to move the markets

Try using the Andrews Pitchfork tool in MT4, especially in the next higher timeframe from the one you are trading on, once drawn you can change back to the trading timeframe. (also known as median line trading).
Search on Youtube, many videos explaining how to draw them. If price respects the upper & lower channels, leave them on, if price breaks out, and forms the next high or low, look to redraw & update the AP lines.
If anything, this tool will teach you how to draw trendlines.

Trendlines visualize on the chart how trend followers buy dips in uptrends and build up their longs and how they sell rallies in downtrends and build up their shorts or sell their holdings.

Classic technical analysis tells you to connect 2 or more successively higher bottoms to draw an uptrend line and to connect 2 or more successively lower tops to draw a downtrend line. This is the typical text book definition and how to.

Classic technical analysis also tells you that a trendline acts as support or resistance and the more times the price bounces off a trendline, the stronger it gets and the more you can rely on in the future. I have always disagreed with this concept of trendlines because it's not true in real life.

Trends tend to near their end as they unfold and as time passes. So when you see a trendline being tested 4 or 5 times, chances are increasing that this trend is nearing it's end (not necessarily a reversal, but maybe a major correction) and that the trendline is not to be trusted on the 6th test at all. This represents a complete contradiction with most classic technical analysis interpretations of trendlines, welcome to the real-life.

Excuse me mahdiquant, but the trendlines you drew on the charts in the first post are not really correctly drawn and I would assume that you really can't base your question upon.


Regards,

Nader

Dear Nader thanks for your advice.

Yes! Actually I did not have time to search and find a better example. I know that the top/bottoms used to draw them are not good picks.

I see them as not "Working" at all. Any line based off values of a candle stick, will be broken eventually. Would that be a break of the so called trend? Would price now be headed in a new direction? Would the fate of a country's economic stance in the world be changed just because the price broke a line? Of course not.

Of course not....A line is a line after all and all what it signifies is just a perception on the chart...A perception that there is a higher probability (Based on historical evidence) that the trend is reversing when the line gets broken...Nothing more than that actually...


Regards,

Nader