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Chapter 8, Part II. Trend Lines Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    This is a bit specific price action and word “Trend” itself is not very suitable for this purpose, because trend suggests some acceleration to upside or downside – as we said either higher lows (upside acceleration) or lower highs (downside acceleration), but particularly this feature absents in sideways move. Usually this kind of price action named as “Consolidation” or “Ranging”. There is a well known proverb exists about it – “The market is in consolidation until it’s not”. As you can see from following picture, building trend line with the rules that we’ve just shown above, gives us the lines that look very similar to support and resistance, because the difference between as highs as lows is very shallow. But they are not the same – to build support or resistance area you need just one point. For any trend line you need two points – look at the picture:

    Properties of trend lines

    1. You need at least two points to draw any trend line;

    2. The steeper trend line the less reliable it is, and the more probable that it will break sooner rather than later;

    3. You should never adapt a trend line to market behavior. If the trend line does not fit, then it is just not reliable and inappropriate – do not force it.

    Other rules are almost the same as with support/resistance lines, so let’s just briefly name them:

    1. Trend lines is also not a particular number, but some area around the line;

    2. Close price and 3-period rule also could be applied for determination of breakout of trend line. For instance, if market has closed below/above uptrend/downtrend and holds there at least for 3 periods, then, possibly this line is broken.

    3. Stop-licking or breakout failure pattern also could happen with trend lines as with support/resistance.

    4. The market could lightly penetrate trend lines, and if it has not closed below it, then possibly the trend line is still valid.

    5. After a breakout, the market can retest the broken trend line from the other side. Sometimes this price action is called a “Kiss goodbye”

    6. The longer a trend line is forming, the stronger the move could be after breakout from this trend line.

    7. Trend lines and support/resistance lines are not the same. To estimate support/resistance level will be sufficient even one point. To draw trend line, even sideways, you need at least two points for determination of slope angle.

    8. Longer term trend lines overrule shorter term ones. It means that if in some point meet trend lines with opposite direction, there is a higher probability that longer term line will break the shorter-term.

    9. There is no rule, concerning the strength of trend line, as it is for support/resistance lines, because trend line has a slope and its level changes as trading period passes. There is an opinion still, that trend line becomes stronger with time, but I can’t confirm it. Because from the one side – the more obvious the trend line (i.e. the longer it holds in time), the more traders open position in direction of this trend when market touches it, and hence, add support to this line. But from the other side, more and more trailing stops are accumulated below this trend line. As it becomes more and more obvious, then the stronger the temptation for market makers to press the trend line a bit and trigger these stop orders.
    #1 Sive Morten, Dec 15, 2013
    Lasted edited by : Feb 12, 2016
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