Do Trendlines work?

Hey Pabst:

I am in agreement with you on the issue of trendlines vs. MA's. I had ocassion to have a long conversation with Ben Warwick on the subject. His opinion was that MA's were the only indicators that added value to his work. He figured that this was because so many other technicians were looking at the same ones. I think he was right.

Right now I am using three EMA's (5, 21 and 200 period) on charts with 5 min and 15 min candles. This setup has worked well for years now, and I intend to stay with it until it fails.

The longer I stick around, the more I see that the difference between professional and retail is not the tools. If you look at what folks are really using trendlines for, it is simply to show where the levels are (where buying and selling volume gets activated).

Anyway, I have to start my homework for tomorrow.

Good luck Pabst.

Lefty
 
Quote from EliteInterest:

Hello Kent,

Very interesting. Just want to make sure I am understanding your commentary correctly: trendlines in your interpretation are of a finite length, hence ending in the time domain at the last available data point of the dataset in question. If this is what you mean, would it not be possible instead to use a line of infinite length (ray, or vector), extending in either or both directions, extrapolated into the future (and past) to determine possible area(s) of support/resistance? In this case, the trendline does not in fact have an endpoint, being that it extends infinitely. In my analysis of past data, trendlines serve to indicate those areas of support and resistance, and cannot be used in the strictest sense to predict future price direction, but rather indicate a pivot point, where a move away from the pivot point is most likely.

Instead of 'predicting' future price movement, could perhaps the trendline be used as a low-risk entry point to enter a trade? For example, if your analysis defines a trendline as a possible strong point of support, and price reaches that support, you enter long. If the support fails, you take your stop. Then, if what was previously support acts as resistance, you now have a low-risk entry on the short side should the price 'pivot' away from the new resistance upon a retest. A big risk here, it would seem, is that the trendline defined by the technician is not honored strictly as a point of separation but rather a place where the price action chops through the line repeatedly, hence invalidating the usefulness of the trendline as a quality entry point for a trade. In my research, it seems that there are enough circumstances where, through proper analysis, a trendline is honored enough to be useful as a legitimate edge to extract profits from the markets, particularly on larger issues such as index futures, or commodities futures... I don't want to start posting charts - that is the fun of this game - doing the research yourself to find your own edge. But I will say this, if you take the time to research the charts, it will become clear that a tool as simple as a trendline can in fact be used to find entries, should the trendline be honored, or even broken. Hence, it is a tool used not to always predict (one does have to 'predict' to be able to speculate whether a trade is to work or not, no?), but rather to define a pivot point where price will move away from in either direction.

It seems to me that it is actually rather easy to find trades in this game, but somehow there will always be enough people willing to 'screw it up' somehow - the right trade can be screaming at you "trade me! easy entry!! easy money!!", literally given to you on a silver platter, but still, many traders will find a way to screw it up - taking profits too soon, for example, as a biggie (particularly in my case).

Case in point, I have found so many entries, but didn't have the kahunas to simply HOLD the winning trade until there was a compelling reason to reverse to the other side of the trade.. rather I have tried in the past to daytrade or scalp when my analysis clearly defined a great entry on a longer-term time frame. Mind you, this is for my ventures into discretionary trading, which admittedly is probably more effective in the long run invoked on a longer-term timeframe (discretionary trading, that is).. less stress, less emotional involvement, more time to prepare for the trade.

Sorry to digress a bit here folks. I am interested in anyone elses constructive commentary either embellishing upon what I am saying, or refuting what I am saying with evidence to back it up. Trading isn't just about analysis, obviously - trendlines are just a tool in the kit of the technician.. and besides, to say that a given form of analysis will work ALL the time is folly, obviously - nothing in trading is 100%.. anything can fail - any chart pattern, support/resistance line, whatever, can fail - but does that invalidate the usefulness of the tool in the future? I guess only by testing one's edge (be it trendlines, or some type of statistical analysis, or..) through a large enough past dataset is the only way to have an idea of your edge's long-term efficacy in the future..

Thanks,
ei
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Your comment captures my position, but your postulate re vectors goes one step too far. If trendlines can be extrapolated beyond their endpoints, then the same math that you would use to predict market direction could be used to predict other natural events.

But, prediction of future (random) events violates causality and is therefore not possible. There is no statistical means of predicting market direction based on no information other than price. It is impossible.

This doesn't mean that someone cannot use a trendline as a trading indicator to have some success, but it does mean that in the very LONG RUN, success and failure will even out, and what will be left is a random walk with an upward drift.

Which is why I asked whether the poster had considered that there were some other coincidental "balls" in play, other than the trendline itself.

People may be able to use trendlines to assist them in making profitable trades, but there must be some "other" actor that is the actual cause of their success, because, as I stated, the mathematics absolutely prohibit the trendline itself from being the rationale.

It may be that many other traders are using substantially the same trendline in the same market, and that this is creating a self-fullfilling prophecy, thus causing the market to continue to "trend" in a particular direction. After all, if everyone is buying then the trend is definitely up, so what remains is to figure out how to sell before the other people following the "trend" start selling. Evidently, some of the traders here have figured out how to accomplish this little trick, and that is their "edge" against those traders who have not learned.

Obviously, there are other means of getting an edge in the market. We either have some winning methods, or we are losers, one or the other.

PS. Someone will almost inevitably bring up short-term weather prediction to try to refute my position re market prediction. Unfortunately, short term weather forecasting does not use trendline analysis as a predictive mechansim, so the analogy is false.
 
I believe trendlines/flag patterns can be useful in equities. Just like anything else, a tool in your arsenal.

Daytrading the ES, I believe trendlines are of less help than say, S/R. Trenlines on a smaller timeframe are of less value, imo. Especially, since the ES is not trending now :)
 
trendlines are basically taught in the first or second chapter of any introductory t/a book.

ask yourselves. have you ever met anyone who became ridiculously rich after only reading chapter 1 or chapter 2 of any introductory t/a book?

:p
 
Quote from Anseld:

trendlines are basically taught in the first or second chapter of any introductory t/a book.

ask yourselves. have you ever met anyone who became ridiculously rich after only reading chapter 1 or chapter 2 of any introductory t/a book?

:p
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The fact that something is taught doesnt imply that the readers really learn much. I could cheerfully trade with nothing other than trendlines (db would say I didnt need them but I like them) although I also use a couple of mas (which to me are forgiving trendlines).

It doesnt matter if the only reason they work is because lots of people use them ... thats not so much a self fulfilling prophecy (unless you are all of the users) as an opportunty to observe an edge for your trading. (Yes, kj, trading is all I do, and I agree with Lefty too)
 
Personally I think they're great! I love it when a woman has obviously changed from wearing a regular bikini to a mini-bikini, and you can see that white patch of skin outlining her old bikini bottom just above her crotch. That is sexy as hell, especially -

Oh wait, you said trendlines. I thought you said tanlines.

Never mind.

H
 
Quote from duard:

I am starting this thread to propose an hypothesis regarding why I believe trendlines are significant, not random and of use in trading.

I believe many "major" trendline breaks are correlated to "news" or "fundamental" changes in a given market. Trendline breaks then reflect this change.

For instance let's say you have an 11 market day uptend on a daily chart. HH and HL. But then oil, inflation, non-farm payrolls, etc. fundamentally change the perception of the current price trend and you get a price trend break from up to either down or consolidation.

That is why I believe trendlines work.

Any thoughts or research to support or refute this simplistic view of trendlines is welcomed.


D.
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^^^^^^^^^^^^^

Like to occasionaly use moving averages- a form of trend lines, however;
you have to do a lot of work, its not the trendlines that work, you do the work


And as far a straight trend lines mess that many ''TA'' trders draw- thats just a mess;

botom line trend lines do NOT work -you do the work.:cool:
 
Quote from duard:

I am starting this thread to propose an hypothesis regarding why I believe trendlines are significant, not random and of use in trading.

I believe many "major" trendline breaks are correlated to "news" or "fundamental" changes in a given market. Trendline breaks then reflect this change.

For instance let's say you have an 11 market day uptend on a daily chart. HH and HL. But then oil, inflation, non-farm payrolls, etc. fundamentally change the perception of the current price trend and you get a price trend break from up to either down or consolidation.
That is why I believe trendlines work.
Any thoughts or research to support or refute this simplistic view of trendlines is welcomed.




Trendlines based TA must be a continuous process done simultaneously on several timeframes.
Conventional use consists of establishing channels and s/r slopes and levels.
Advanced trendline TA ( market geometry ) is ,as of now, the best universal tool for forecasting price reversals in any volatile market and any timeframe .
Although very accurate, trendline TA benefits greatly from confirmation method best suited for any particular market.
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Quote from Anseld:



ask yourselves. have you ever met anyone who became ridiculously rich after only reading chapter 1 or chapter 2 of any introductory t/a book?

:p
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as opposed to the loads that got rich by reading the entire book?

Like I said, they are a tool. Some successful traders use them, some don't. Which implies that when used correctly, they are helpful.

Its funny when people here talk about some trading tools and act like just because they don't use them in they're strategy, they are useless for anything. Thats like asking, 'hey man, can you use a fork to eat?" and somebody answering, "No, they're pieces of shit....I tried all day to eat my tomatoe soup with one and it was a waste."
 
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