Strength Of Trendlines

Hi,

Can a pro who has been using trendline’s tell me of their experience when usually they are broken or when best to buy or sell of a bounce or when they break? After trading for 1 year I find it breaks usually on the 4th or 5th bounce more of the 5th bounce break and the odd occasion 3rd while the 2nd bounce is the strongest.

Thanks.

Well typically there are a few rules that tend to be proven more often than not.

- the STEEPER the trend line the WEAKER the support/resistance.
And opposite of course.

- if it is confluenced with other areas, i.e. Fibs, pysch levels etc. It is more likely to hold.

- more times a trend line is hit the stronger the support/resistance but when broken there would be a bigger breakout.

Here are just a few rules.

Hope this helps.

Hi Pip

IMHO keep your trading method simple possible, I respect those whoe trade PA and SL without indy. I do use MA as springboard for trend, entry together with PA and SL.

BTW can you elaborate more what you wrote above with charts?

Cheers

With trendlines formed on flags, pennents, and formations of this type of nature, I tend to let price hit or break the trendline and wait 1-4 bars to see what happens after. Depending on the PA (did we have a quick retouch to the trendline before resuming direction? did price barely break the trendline and then slowly fade back, no momentum? etc.), I'll either fade the move, stand aside, or try to enter in the direction of the break on the first retracement (ideally back to the trendline).

I never enter in the direction of the break on the break. If I want to get in on that direction, I always wait for a retrace.

I agree with Smittens..I am new to the forum, but I have 10+ years of trading experience. My experience with buying or selling the break is that typically you expose your account to a large amount of risk with pennants or wedges. I have seen som many people sell the break and then think that the opposite trendline is where they should place their stop. Those are typically, high risk, low reward trades..1:1-1:2 if that....My approach with trendlines is to watch how the market reacts to the trendline. If it breaks, it almost always tests and then I watch the structure of the test. Is it corrective? and if so then I can define my risk, because I will not allow the price to go back through it too far. My primary use of trendlines is for confirmation, not entry. Confirmation of the existing trend continuing combined with previous Fibonacci and support and resistance level. If the market pulls back in an overlapping pattern and I have all of those in place...to me that is high probability trade. Just my two cents...

trendline can be useful forex trading tool, but caution is needed before using trendline as a signal to entry position, but if we can plotting right a trend line it can gives very valuable information.

-----

day trading

Some useful advice from Peter Brandt that holds up to observation (from the book Diary of a Professional Commodity Trader):

I greatly prefer to trade a pattern that offers a horizontal or flat boundary, such as the boundaries of a rectangle, ascending triangle, H&S, etc. I consider such patterns to be horizontal. The reason these are superior patterns for trading is that the penetration of a boundary line most often occurs simultaneously with the violation of a major or minor high or low point within that pattern . . .Diagonal patterns, by contrast, have slanted boundary lines. This creates three practical problems. First, my experience is that there are far more false or premature breakouts of slanted chart lines than in the case of horizontal boundaries . . .

Slanting trendlines can be a bit more 'in the eye of the beholder' than horizontal ones on things lie triangles etc, I think thats why they're not as effective (although they sure look great AFTER the fact!!).

Agree with bevok and Ewaver's posts.

Would just like to address one part of bevok's post, from Peter Brandt's quote (never read him, but I digress): "Diagonal patterns, by contrast, have slanted boundary lines. This creates three practical problems. First, my experience is that there are far more false or premature breakouts of slanted chart lines than in the case of horizontal boundaries . . ."

I absolutely agree that they create more false breakouts > this equals opportunity, to me. Diagonal patterns, especially shorter term ones (i.e. only 2-3 swing hi/los to connect for the trendline), represent 'pausing' patterns in on-going trends in my opinion. These are the trendlines that I tend to fade WAY more often than I try to trade in the direction of the break. That is to say, if we're near the daily low, in a down trending day, and a flag/pennant/triangle/pikachu begins developing, let the pattern develop, let the trendline form, then wait for price to break the top of the this trendline. If it does not break through with big momentum in 1-3 bars, it's usually an ideal opportunity to fade back in the direction of the original trend-- you reduced risk by entering on a retracement, and your still trading in the direction of the original trend. Worst case scenario is price shoots through your stop and you're out. Next worst case scenario is price hovers slightly higher or lower than your trade entry, and the pattern plays out into something differently-- not necessarily a bad thing, as it could just be a longer pause than anticipated. As a caveat, these also in my opinion are some of the toughest psychological trades to master. When the EURUSD has moved 180 pips on the day, traders tend to think "it can't go any more", and when a pattern begins forming, the tendency is to start licking your lips at the pending reversal... which probably is not happening.

The bounce is not a good measurement. Bounce varies from time to time, hour to hours. Assume that everything is moving easing your expectation level. But suddenly a big player opened a big position investing millions of dollars, then simply there would be a big bounce regardless of any law.

I agree with two and two-thirds of Jeremy's three points above (I'd have left out the word "Fibs", myself, from the middle point).

How momentum and range areas on a trendline define the line, is a strong determinant of how price leaves the trendline. How big or small, the sharpness of definition, and the juxtaposition with other areas and their trendlines are three other determinants.
What I've found is that, also dependent on the other three variables, momentum keeps price around, eventually fading, and range structures around price, sharply pushing price away. Examples: 1,2

I suppose this would be ironic to a channel (range) or fan (momo) user; and, of course, most trendlines have a mix of both, even to the extent of several momentum structuring onto a series of discrete, aligned points vs. each other into a range or visa-versa for range.

Also, a neat way to draw trendlines, in addition to connecting pivots, is to connect the midpoints of different small areas.