ASX Charting Course

Chapter 2 Trendlines

Up Trend Line - Construction

Use an open/high/low/close line and bar graph, (open is optional) constructed over set time interval bars along the horizontal axis and equal price divisions in the vertical. The time frame can be anything, but commonly used time intervals are 5, 10, 15, 30 and 60 mins, then daily, weekly and finally monthly.

If the price action is generally heading higher draw a straight line beneath the chart bar lows. Link at least the two lowest points and extend the line beyond the current date. The more points you can link the better the trend, three points is ideal to denote a trend, preferably not consecutive bars.

Use
One can assume the market will continue in the direction of the trend until the trend is broken. In the case of an uptrend, buying opportunities are presented when price is above the trend line. One can use the fact that the trend line has just been tested and held, as a signal to buy the market. Tested and held, meaning price has moved down to the trendline, touched it and then rallied, moved higher.

Conversely, it is true, that upon a break of that same up sloping trendline one could interpret that as a valid signal to sell. That could be to liquidate a long position or even to instigate a short position.

Down Trend Line - Construction

A bear market is denoted by lower lows and lower highs occurring on a normal bar chart. In this case we construct the down trendline by drawing a straight line across the tops of these bars and the slope of the line will be down. It’s good to pick up as many points as you can and they don’t always have to be exactly on the trendline. The term trend actually means “ … the general course, the general direction.” Therefore, as in the example of the chart in Figure 2, we can allow for minor digressions above the trendline, before we determine a the trendline has been broken.

Use

As price gets close to the down trendline it provides us with the best opportunity to sell the market, to get short. The further we are from the trendline the greater the risk attached to selling short.

“Up by the stairs and down via the elevator.” Bear markets can often be extremely vicious and for futures traders can provide some of the biggest trading windfalls. It seems that spike lows are often more prevalent than spikes on the high side. This is typical of bear markets, but by the same token these same spike lows often denote the end of a move, the end of a trend. But then according to trend line theory we should wait until the trendline is actually broken before we can say that the down trend has finished.

A trend line is broken when, in the case of the downtrend, price moves above the trend. Some traders require the close of the relevant price bar to be above the trend line, which will often save the trader from “whiplash”. Whiplash is getting taken out of the market when the trend is broken only to find the trend resumes immediately and wasn’t really broken. So unlike pregnancy, there are degrees we can use when it comes to determining when the trend has been broken or whether in fact it has been broken.