If You Can Draw A Straight Line . . .
- Thread starter dbphoenix
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If you mean trend channels, this was addressed in another thread a few days ago. The post I made referenced the following chart:
The instructions for drawing the trendlines are in the second paragraph:
The dotted line. Appears to be mid point of the trend. What is the purpose of that?
As RN says, it's the midpoint, or midline. If you're familiar with auction market theory, you know about trading ranges and value areas and midpoints/means and mean reversion. The trend channel is simply a diagonal trading range with the same "midpoint". The channel is created by traders trading away from the mean. At some point, the activity reverts to the mean. It can then reverse and go back where it came from, or it can breach the mean and move to the opposite extreme. Or trades can cluster around the mean, as they did in 2012. This reversion to the mean from the extremes is what leads many people to believe that trendlines and channels provide support and resistance, but what appear to be support and resistance are more a matter of standard deviation.
As to the trendlines themselves, the first is drawn below the first two swing lows. As RN explained earlier, this line is then copied and plotted across the swing highs beginning with the first swing high between those two swing lows. All of this is then projected forward in a straight line. The lines are not changed if price breaches the line since much of the purpose of drawing the lines in the first place is to be alerted either to "oversold" and "overbought" conditions (i.e., price ventures outside the lines) or to a potential change in trend and even a trend reversal.
It is also worth noting that this channel could not be drawn until late 2011. The first channel would be drawn at a severe angle under the first two swing lows in 2009. Such an angle could not be sustained and the channel would be broken by the end of the year. As higher highs are made, the channel begins to rotate downward until it reaches a sustainable angle, in this case by 2011. This particular trend has been sustained for more than four years.
As to what is a "sustainable angle", that depends on what traders are comfortable with and how crazy they become. If the angle is reasonably gradual, a great deal of trading will go on at any given point or level. This trading will provide substantial support in an uptrend (and resistance in a downtrend). Parabolic moves, on the other hand, often collapse as rapidly as they rise because there are so few trades at any given level during the ascent; there's nobody there to support the price. Exceptions to the "sustainable angle" can be quite lengthy, as with the Naz in 1999, or, really, 1994 all the way to 1999. But that had largely to do with traders losing their minds, which a great many paid for soon thereafter when the market collapsed.
Quote from dbphoenix:
And the afternoon:
On the long, you go long before the 50% retrace area is taken.
Per your rules:
"When the line is broken, price is given a chance to retrace. As long as it doesn't retrace more than 50%, the trader stays in the trade."
so why did you long prematurely before the 50% line was broken?
Thanks
I don't know that I'd call it a "rule" (if I did, my apologies). It's more an indication of market sentiment, i.e., the balance between buying pressure and selling pressure.
Be that as it may, if you're referring to the last long and the 50% retr of the immediately-preceding downmove, the short is old news after the "supply line" is broken and a double bottom is made. There's no suggestion of a continuation but rather a change in the balance between selling pressure and buying pressure: sellers appear to be done. If that's the case, price will rise (the "line of least resistance"). If it doesn't, the long will never be triggered, in which case price will most likely move sideways (it may eventually continue downward at some point, but nothing can be done about that unless and until it happens).
As a side note, the lateral dotted lines that don't have "50%" on them refer to the swing points, which are expected to provide minimum support. If they don't, that violation can be used to exit at least one contract, if trading more than one.
If one keeps an open mind, the market will tell him what to do.
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