Trendlines

Trendlines are probably the most easily used tool in technical analysis. But this in no way should take away from their significance or effectiveness in interpreting a commodity price chart.

 

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We can make the assumption that a trend line is nothing more than a graphical interpretation of a price level where buyers or sellers execute oders that move price either higher or lower. In most cases, parallel trend lines can be drawn that contain an entire existing trend. In an uptrend, the bottom of the two parallel trend lines represents price support and the top trend line represents price resistance. ( See chart below ) It is import to understand that any trendline obtains its significance and credibility by a combination of several factors: the number of times it has been hit, the duration or length of the line itself and the angle or pitch of the line. Trendlines can be either perfectly level , in which case a channel is often formed, or they can have any degree of ascent or decline to them.

First of all, the more times a trendline has bit hit or approached, the greater the importance of that line as a support or resistance area in the market. A trendline that has been hit five or six times has much more significance than one that has only been hit twice. Therefore, when a significant trendline is broken or violated, the following price movement will have a greater implication or significance. In other words, a more credible buy or sell signal.

Secondly, basic trendline analysis point out that support and resistance areas may shift over time. This is why angled trendlines can very easily contain an entire trend. Allowing trendlines to be drawn at an angle compensates for this altering of support and resistance levels and will allow for the trend lines to sustain their correctness over a long period of time.

It seems trend lines that rise or fall at a greater angle are not as sustainable as trendlines that have a lesser degree of pitch to them. Steep trendlines often represent an temporary phenomenon occurring in the market and price will often correct itself in an equally dramatic fashion when the underlying event has been priced into that particular commodity market.

When using trendlines as a technical tool to enter into a trade, it is often a good idea to place a stop order at a specific price, that if the trendline is broken, your trade will be initiated in the direction of the violation. I highly recommend using this approach in conjunction with the other techniques discussed in this section. On the other hand, when using trendline violation to exit a trade, ( orange circle below )it is a good idea to trail an established trend with a stop order to get out of your position when that trendline is broken.

The old saying "the trend is your friend" seems so simple that many traders ignore it due to its lack of conviction or complexity. Trading the futures markets does need not be a complex process. The simpler your trading approach and philosophy, the less room there is for error on your part.

 

Trend Lines | Stochastics | 1-2-3 Formations | Pulling the Trigger

 

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