Author Introduction
Gabriel Yeh, the primary author of this article, is a talented enterprise trader and senior analyst who created his own compounding multiplier asset management model which grew from $2,500 to $100,000 in just three weeks when he was 18 years old. Time of writing: 28/09/2018
Last article examined the fundamentals of trendlines. But a proper analysis is not as simple as drawing an angled line, judging rebounds and analyzing breakouts. Therefore, this article seeks to explore trend lines further; details advanced analytical methods, and describe specific trend line scenarios in details.
Develop a Standard for Drawing Trend Lines
1 To draw an uptrend line, first, find the lowest point from which the trend starts to rise.
2 To draw downtrend lines, find the highest point from which the trend begins to dip.
3 The shadow of one candlestick to another can be connected.
4 The shadow of the open/close price can also be connected.
5 Alternatively, connect one open/close price to another open/close price.
Connecting shadows：
Connecting Open/Close Prices：
The above diagrams have something in common：regardless of whether the shadows or open/close prices are connected, these three points will all fall onto the same angle line, thus fulfilling the requirements for trendline analysis.
Using a mixed method of shadow and Open/Close(1)：
In this diagram, a shadow was used to define point 1 and an open/close price for point 2. After drawing these two points onto an angled line and extend it, point 3 fails to hold above the trend line, making it too complicated to tell whether this is a fake breakout or a true breakout. Therefore, this method is not recommended.
Using a mixed method of shadow and Open/Close (2)：
In the diagram above, point 1 is the open/close price, and point 2 is the shadow price. After drawing an angled line here and extending it, point 3 does not touch the trend line before rising again. Many would falsely assume that this is an unfinished market trend, leading to poor judgment, as such this method should be avoided as well.
Fake Breakout area：
As can be seen, the market breaks above the downtrend line after point 1 and point 2. This might mislead to a prediction that the price will retest the downtrend line and then enter into an uptrend (as the black arrow shows); unfortunately, that is not the case. Instead, it continues to decline, forming a downward trend (as the blue arrow shows). This scenario is called a “fake breakout.” At this point the downward trend line should be re-adjusted.
The Adjusted Downward Trend Line is Shown Below：
To avoid misjudgment, connect multiple peaks with an angled line and extend it.
Special Usage: Breakout Trend Lines：
Connect point 1 and point 2. The trend line is challenged by the breakout at red circle a and fails to connect the trough in the breakout area. But point 3 touches the angle line, and the price returns to an uptrend again. This uncommon scenario has a slim chance of success, but can still be used as a reference.
Special Usage: a combination of Breakout Trend Line and Trend Line：
When the peaks in the black circles are connected in the diagram above, a downward breakout trendline can be seen. After merging the points of the lower blue circles, it is visible that the price falls on the cross of the uptrend line and downtrend line (marked in red). If the price successfully rebounds and continues to go up from here, can consider entering the market, setting the stop loss at a previous trough and leaving the market with profit when the price falls below the trend line.
Conclusion
It is imperative to constantly correct the angles lines used in order to adapt as the market won’t necessarily develop according to expectations. This method is used by most individuals with years of trading experience.
Keep practicing! If you have any questions or opinions, please feel free to leave us a message. Thank you for reading, and look forward to the next article!
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