Trendline Tips and Tricks by Sylvain Vervoort

Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort

Tantalizing! Trendline Tips And Tricks

How do you capture those medium- to longer-term moves in and out quickly at turning points is not that difficult. But when trying to enter and exit trades quickly? how do you stay in a trade to capture those medium- to longer-term moves while acting quickly to enter or exit at by Sylvain Vervoort the same time? Let me show you some tips and tricks using JOSE CRUZ trendlines that can help you achieve this. aydreaming about trading? Get in a trade early It is important that you always use the same number of D and close to the low point; stay in as long as horizontal and vertical pixels for your chart with preferably needed and get out fast at the top! The problem, the same number of price bars. That way, you will develop of course, seems to be the middle part. Getting the experience of looking at the slope of a trendline with Copyright © Technical Analysis Inc. www.Traders.com Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort charting

respect to the time period you want to trade in. 45 In Figure 1 you can see how the slope of the trendline can go from very sharp for the short term to Short-term moderate for the medium term and inclination 40 rather flat for the long term within Long-term the same long-term time period. inclination The longer the time period to look 35 at, the more reaction in price must Medium-term be allowed, and hence the flatter the inclination trendline. 30 Ti p s a n d t r i c k s Jul Aug Sep Oct Nov Dec 2007 Mar Apr May Jun Jul Aug Sep Oct Nov Dec METASTOCK When there is a nice move up from Figure 1: The character of trendlines. Here you see short-, medium-, and long-term trendlines. The short- bottom to top, you may not need term trendline has a steep slope, the medium-term trendline has a moderate slope, and the long-term trendline has any special tricks, but there are a less steep slope. still some useful tips that we can discuss. In Figure 2, the up move began after breaking a short-term red downtrend 35 line at the beginning of July. The thick 34 blue medium-term uptrend line was 33 drawn after the turning point around mid- August. A parallel line drawn through the 32 top of mid-July forms an uptrend channel 31 and, looking ahead, we see price touching 30 the lower and upper part of this channel several times. 29 Every bounce at the lower part of the 28 channel is a support level (horizontal red 27 lines) for the uptrend. After a double-top pattern (thick green line), the price falls 26 through the medium-term uptrend line and 25 breaks the medium-term uptrend. There is 24 a confirmation when price falls through the last support line. 23 There are a few more interesting things 22 here. Note how every short-term green 21 uptrend line has practically the same inclination. This happens frequently. You 20 can apply this to determine where the price will reach the upper side of the channel July August September November before reversing. This way, you can Figure 2: a straightforward medium-term upmove. Here, the up move was started after breaking estimate the short-term future price and a short-term red downtrend line at the beginning of July. The thick blue medium-term uptrend line was drawn time period. This is good for swing traders. after the turning point around mid-August. Another aspect worth considering for estimating the medium-term uptrend right from the beginning Ac c e l e r at i n g a n d d e c e l e r at i n g t r e n d s is the inclination of the new uptrend signaled by the low If the up move is not a straightforward process as in Figure 2, values of the bars at the beginning of the new uptrend (see price will accelerate or decelerate. Price acceleration is usually Figure 2 for a detail). You can, of course, use price bouncing back to the Get in early and close to the low point. medium-term trendline to enter a trade or extend your position. However, be prepared to close the position quickly Stay in as long as needed and get out when price turns down without making a new top. Make sure fast at the top! The problem, of course, you close a position when the medium-term uptrend line is seems to be the middle part. broken or when the last support line is broken. Copyright © Technical Analysis Inc. www.Traders.com Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort charting

a three-step process. The trend is broken after the third step, which is when the trend shows the highest acceleration. Many times, you will see that these changes in acceleration are announced by a chart pattern. In Figure 3 you see a trendline with a relatively 35 flat up move between the buying point (bottom left) 34 where the medium-term downtrend line is broken 33 32 to the upside, and the turning point at (1). 31 At (2) you switch to a higher gear. Keep an eye 30 on the previous support (red) line. If this support 29 28 is not broken, it is very likely that the trend has 27 accelerated. Note how the start of the acceleration 26 is announced by a triangle continuation pattern. 25 24 A similar scenario takes place at point (3), where 3 23 the trend switches into its highest gear. 22 The uptrend is finally broken when the closing 21 20 price falls through the uptrend line or the last 19 support line. Here, the end of the uptrend was 18 announced by a failing new high and a double- 2 17 16 top price reversal pattern. 1 15 A decelerating price up move is also quite 14 common. It is more difficult to handle because Feb Mar Apr May Jun July Aug Sep Oct Nov Dec trendlines are broken while price keeps moving FIGURE 3: AN ACCELERATING UPTREND. Price acceleration is usually a three-step process. The trend up. A longer-term uptrend starting with a sharp is broken after the third step, which is when the trend shows the highest acceleration. up move will slow down. Short-term reactions will hold up the main trend. In Figure 4, we entered the trade after the medium-term downtrend line was broken and the bullish engulfing pattern in the candle chart 35 was confirmed. The up move started with a sharp inclination. After about three weeks, this uptrend line was 30 broken. If you are not a swing trader and are waiting for a relatively medium- to long-term up move, you should wait and make use of the 25 first available support line as a selling level in case price continues to move down. In this case we are using the support of the window (gap) 20 in the previous up move. Just after a couple of days, the uptrend resumes. This enables us to draw the second, less-inclining 15 uptrend line. Note that this trendline is broken downward after a couple of weeks. Again, you use the last support to stay in the trade. About 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 a week later, the price moves up again. You can October November December 2002 now draw a third, even less-inclining uptrend line. As you can see, this line holds for a longer FIGURE 4: A DECELERATING UPTREND. A decelerating uptrend is more difficult to handle because trendlines are broken while price keeps moving up. period of time until it is broken, confirming a dark cloud cover pattern in the candlestick chart. It should be clear that even if this is not the final top, it is a good time to take the 100% profit now.

Sh a r p t u r n i n g p o i n t s A sharp V-type turning point makes things more difficult. It becomes impossible to draw a medium-term trendline from the lowest point. In Figure 5, during the second half of March, there 46.0 is a big hammer candle afer a big sharp 45.5 45.0 down move. The hammer itself or the 44.5 44.0 confirmation after the hammer is a good 43.5 buying point. 43.0 42.5 It is not possible to estimate the medium- 42.0 term inclination, even using the May price 41.5 41.0 reactions, because the inclination remains 40.5 too steep and trendlines are broken several 40.0 39.5 times through these reaction points while 39.0 price continues moving up. 38.5 38.0 In these circumstances, it becomes nec- 37.5 essary to look for ways to draw a flatter 37.0 36.5 trendline. In this case, it looks like the only 36.0 35.5 possibility is to use previous or following 35.0 candles at the low turning point and ignore 34.5 34.0 the V-pattern. As you can see, the lows of 5 12 19 26 2 9 16 23 30 7 14 21 29 4 11 18 25 2 9 candles before the hammer and the low of March April May June July a following candle after the hammer were used to start an acceptable inclination for FIGURE 5: TRENDLINES AND V-SHAPED TURNING POINTS. It is impossible to draw a medium-term trendline from the lowest point. In such cases you need to look for ways to draw a flatter trendline. Here it looks like the a medium-term uptrend. only possibility is to use previous or following candles at the low turning point. By the end of April, it became clear that this was the correct trend. Eventually, you 15.5 can move above the original line. See the 15.0 dotted blue line with the same slope as the original line. This more closely follows 14.5 the actual price lows. We can also draw a 14.0 parallel line to create a price channel. 15.513.5 Moving forward, there seem to be higher 15.013.0 lows and higher highs within the price 14.5 channel until the end of June, when price 12.5 14.0 turns without making a new high (actually 12.0 a double-top reversal pattern). At this top 13.5 11.5 you also see a bearish engulfing pattern in 13.0 the candle chart. This is more than enough 5 11.0 12.5 reason to close the position at this point. 4 10.5 12.0 The latest you should close the position is 10.0 when price drops through the medium-term 11.5 uptrend line or through the last support 5 3 9.5 11.0 level (red line). 2 9.0 1 4 10.5 10.0 In v e r s e t r e n d l i n e s February March April May June When it comes to estimating the slope 3 9.5 FIGURE 6: USING THE INVERSE TRENDLINE. One of possibilities is to use a parallel line with an inverse of a future medium-term uptrend line, 1trendline. If 2you draw this parallel line through a low point of the up move, you not only get the medium-term9.0 there are a few tricks you can apply uptrend line but also a medium-term price channel. successfully. One of them is to use a February March April May June parallel line with an inverse trendline. If you draw this parallel line through a low point of the up move, you not only get the medium-term uptrend line but also a medium-term price channel. Copyright © Technical Analysis Inc. www.Traders.com Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort 48.5 charting 48.0 47.5 47.0 46.5 46.0 and then project a parallel line through 45.5 the low at (3), you are prepared for future 45.0 price movements. And as you can see, 44.5 that was the correct medium-term trend. 44.0 43.5 43.0 An d r e w s p i t c h f o r k 42.5 Another trick to estimate the future price 42.0 trend is making use of the Andrews 3 41.5 pitchfork. In Figure 7, let’s say you open 41.0 a position when price rises above the 40.5 40.0 medium-term downtrend line. 39.5 After the first down reaction, you can 2 39.0 draw an uptrend line between (1) and 1 38.5 (2). The slope of this line looks flat and is probably not what you can expect for a November December 2004 February March medium-term uptrend. Here you have a nice FIGURE 7: ESTIMATING FUTURE PRICE CHANNEL WITH ANDREWS’ PITCHFORK. Here you have an opportunity to draw a pitchfork between the opportunity to draw a pitchfork between points 1, 2, and 3. You can continue to draw the accelerating uptrend points (1), (2), and (3). Future price develop- lines and exit the trade when the steepest uptrend is broken. ment proved that this was the right thing to do. You can, of course, continue to draw the accelerating uptrend lines (as shown), and 17.0 exit the trade when the steepest uptrend is broken by the closing price. 16.5 If you extend the second uptrend line and 16.0 parallel line, it will give you an uptrend 15.5 price channel that fits almost perfectly with 15.0 the pitchfork. So the latest you would get 14.5 out of the trade is when price is falling out 14.0 of this channel (not shown). 13.5 The last trick I want to show you is the 13.0 use of a 30-day Em a . This average gives 12.5 you some kind of an active trendline. In 12.0 cases where all other methods fail, you 11.5 can use this average to estimate the slope 11.0 of the future up move. 10.5 10.0 Tr e n d l i n e s u s i n g 9.5 m o v i n g av e r a g e s March April May June July At the end of February, when the closing FIGURE 8: TRENDLINE BASED ON THE BEGINNING OF AN EXPONENTIAL MOVING AVERAGE. The EMA price crosses the medium-term downtrend starts rising after a downward followed by a flat move. From the up turning point you only need about seven days line, a position is opened (Figure 8). of data to draw an uptrend that coincides with the up move of the average (brown line between the two blue There is a slight upward move until the dots). If you extend this line to the future, you can see this slope closely matches the price movement. beginning of April. So the uptrend line that you can draw is probably too flat In Figure 6 you would open a position when the closing price for a medium-term up move. The other techniques discussed breaks above the medium-term downtrend line. You can use a previously do not provide a solution that will result in a better stop just below the low of (2). You can draw an uptrend line estimation. Assume you are at the point indicated by the blue through the lows of (1) and (2). In less than four weeks, this rectangle (there is a detail view at the right lower side of uptrend line is already broken. Since the price is close to the stop the chart). The 30-day exponential moving average (Em a ) level, I would just wait to see what happens next, because there is (green) is plotted on this chart. After a downward followed still the likelihood of a medium- to longer-term uptrend. by a flat move, it is now rising. A low at (3) is formed and price moves up again. The Starting from the up turning point, you only need about new uptrend line between bottoms (1) and (3) seems too seven days of data to draw an uptrend line that coincides flat for the medium-term uptrend. So what could be a more with the up move of the average (brown line between the two reasonable gradient? blue dots). If you extend this line to the future, you can see If you draw the reverse trendline through tops (4) and (5) this slope for the medium-term uptrend closely following the Copyright © Technical Analysis Inc. www.Traders.com Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort 5 charting 33.5 33.0 32.5 32.0 that is a morning doji star bottom reversal 1 31.5 pattern (2) in the candle chart. It’s time to open a position. 31.0 You could keep a stop at the low of the 30.5 window (gap), but since the low of the doji 7 30.0 turning point is very close at (3), I decided 6 29.5 to keep it at that point. Price moved up 29.0 to (5) and reacted back to (4), but is now 4 28.5 turning up again with an island reversal 28.0 pattern at (7). You can now estimate the future price up 27.5 2 move. You can draw the brown uptrend line 3 27.0 between the low points (3) and (4). You can 10 18 24 3 10 17 24 31 7 14 draw the gray reverse trendline through (1) February March April and (5) and you can draw the lighter blue FIGURE 9: CONFIRMING THE MEDIUM-TERM UPTREND. Here you see how you can combine trendlines trendline (for the fast up move) that coincides with candlestick chart patterns. with the first seven days of the movement up to the 30-day Em a . And finally, you can draw a red pitchfork between the points (4) and (5) and a previous low point. 39 If you were to use the first lowest point (3), 38 it would give you a sharp unrealistic steep 37 pitchfork. On the other hand, using the high point before that would give you a very flat 36 pitchfork. So the most acceptable point is the 35 low point before that. This is confirmed by 5 34 different prices coming close and touching the median line of that pitchfork. 33 In Figure 10, you can see that all the 1 32 techniques I discussed here can be applied 31 favorably and predict the medium-term uptrend slope quite well. I hope these tips 30 and tricks will be useful in estimating future 6 29 4 price channels using trendlines. 28 27 Sylvain Vervoort, living in the Flemish part of Belgium, is a retired electronics February March April May June engineer. His new book Capturing Profit FIGURE 10: RESULT OF UPTREND ESTIMATION USING DIFFERENT TECHNIQUES. Here you see how With Technical Analysis: Hands-On Rules some of the different techniques such as trendlines, Andrews pitchfork, exponential moving averages, and For Exploiting Candlestick, Indicator, inverse trendlines were applied to predict the medium-term uptrend. And Money Management Techniques, published by Marketplace Books, is about price movement. applying technical analysis and introducing a trading method Lines parallel to this trendline make a nice future price called Lo c k i t , featuring his own techniques and proprietary channel. The position is closed when the closing price drops out indicators. Vervoort may be reached via his website, http:// of this channel. If the start of the exponential average uptrend is stocata.org. very sharp, you should compensate the angle downward. This is contrary to when the start of the uptrend is flat, in which Su g g e s t e d r e a d i n g case you should compensate it upward. The idea is to have a Mikula, Patrick [2002]. The Best Trendline Methods Of Alan reasonable slope. You can always adjust the trendline later on Andrews And Five New Trendline Techniques, Mikula using other techniques as price continues to develop. Forecasting. Vervoort, Sylvain [2007]. “Trading Trendline Breaks,” Co m b i n i n g d i f f e r e n t t e c h n i q u e s Technical Analysis of STOCKS & COMMODITIES, Volume It is always a good idea to combine different techniques to 25: September. confirm the medium-term trend. The thick blue downtrend line (1) in Figure 9 was broken in mid-March. Just prior to S&C Copyright © Technical Analysis Inc. www.Traders.com

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