CMC Markets Trading Smart Series: Trendlines

340 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
340
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
14
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

CMC Markets Trading Smart Series: Trendlines

  1. 1. Trendlines THE CMC Markets Trading Smart Series January 2013
  2. 2. Trendline strategies Trendlines are used in technical analysis to define an uptrend or downtrend. Traditionally, uptrend lines are made by drawing a straight line through a series of ascending higher troughs (lows). A trend line could also be called a ‘trend support line’ because it shows the direction of a trend, and it acts as a support line, similar to that discussed in the introduction to support and resistance section. In the case of downtrends, trendlines are formed by drawing a straight line through a series of descending lower highs. See figures 1.1 and 1.2 for examples of down and up trendlines. It is usual practice to join the highs or lows (wicks) of the candlesticks and not the closing prices. Uptrend and downtrend examples Figure 1.1 – A trendline (in a downtrend) set through the highs Figure 1.2 – A trendline (in an uptrend) set through the lows CMC Markets | Trendlines 2
  3. 3. Common trendline and channel rules The following rules are usually applied to trendlines and channels: 1. Declines in price that approach an uptrend line, or price rises that approach a downtrend line, are often good opportunities to initiate positions in the same direction as the trendline.   2. The penetration of an uptrend line, particularly on a closing basis, is a sell signal, and the penetration of a downtrend line is a buy signal. Normally, analysts apply a minimum percentage price move (1% breach on a stock for example) through the line or a minimum price move.  According to rule 1, as price approaches an uptrend line, the trendline (if it’s a valid one) tends to act as a support, so one would tend to buy as price approaches the line. Please note that it must not be breached. If a trendline is cut through, then we can say in effect that a support has been breached and we should act as we would if it were a normal support break.   Conversely, downtrend lines tend to act as resistances. One would usually sell as price approaches the line — again it must not be breached. In figure 1.3 you will notice our entry points would be chosen with this in mind, providing ‘cheaper’ buy-in levels in an uptrend, nearer the trendline, and in a downtrend, providing higher levels to sell into a downtrend. Figure 1.3 - Setting orders using trendlines in a downtrend The ‘sell’ points in figure 1.3 represent the ideal ‘sell’ orders which would tend to cluster near and underneath a downtrend line. The reason they have to be underneath and NOT above is that a downtrend line acts like a resistance line. Price action above the line would, by definition, be a ‘technical break’ over the line, which would mean a trader could expect a short term spike up and should be looking to exit short trades rather than enter them. Figure 1.4 - Setting orders using a trendline in a downtrend, with a technical breakout CMC Markets | Trendlines 3
  4. 4. In figure 1.4 you can see an example of a downtrend and trendline for most of the chart, with the ideal selling points (shown to us by the trendline) throughout the course of the downtrend. Then, as all good trends do, the trend comes to an end with the break of the downtrend line and resultant short term spike up that follows. Please note: Our platform allows you to draw your own trendlines. You can find this capability in the drawing tools section of the chart. A warning about trendlines and charts in general Changes in trend speed may necessitate the redrawing of the lines. This is particularly important if they are breached temporarily, only to resume the trend, as this could make the lines themselves unreliable. While penetrations of trendlines often warn of a trend reversal, a breach usually also means you will need to redraw a trendline. See figure 1.5 below for a graphical representation of this. It is not enough to show a trendline that works — it is important that the trend method also works. Figure 1.5 - Which trendline is the correct one? Trendlines are used in technical analysis to define an uptrend or downtrend. Traditionally, uptrend lines are made by drawing a straight line through a series of ascending higher troughs (lows). A trend line could also be called a ‘trend support line’ because it shows the direction of a trend, and it acts as a support line, similar to that discussed in the introduction to support and resistance section. In the case of downtrends, trendlines are formed by drawing a straight line through a series of descending lower highs. See figures 1.1 and 1.2 for examples of down and up trendlines. It is usual practice to join the highs or lows (wicks) of the candlesticks and not the closing prices. Uptrend and downtrend examples Figure 1.1 – A trendline (in a downtrend) set through the highs CMC Markets | Trendlines 4
  5. 5. Figure 1.2 – A trendline (in an uptrend) set through the lows Common trendline and channel rules The following rules are usually applied to trendlines and channels: 1. Declines in price that approach an uptrend line, or price rises that approach a downtrend line, are often good opportunities to initiate positions in the same direction as the trendline.   2. The penetration of an uptrend line, particularly on a closing basis, is a sell signal, and the penetration of a downtrend line is a buy signal. Normally, analysts apply a minimum percentage price move (1% breach on a stock for example) through the line or a minimum price move.  According to rule 1, as price approaches an uptrend line, the trendline (if it’s a valid one) tends to act as a support, so one would tend to buy as price approaches the line. Please note that it must not be breached. If a trendline is cut through, then we can say in effect that a support has been breached and we should act as we would if it were a normal support break.   Conversely, downtrend lines tend to act as resistances. One would usually sell as price approaches the line — again it must not be breached. In figure 1.3 you will notice our entry points would be chosen with this in mind, providing ‘cheaper’ buy-in levels in an uptrend, nearer the trendline, and in a downtrend, providing higher levels to sell into a downtrend. Figure 1.3 - Setting orders using trendlines in a downtrend The ‘sell’ points in figure 1.3 represent the ideal ‘sell’ orders which would tend to cluster near and underneath a downtrend line. The reason they have to be underneath and NOT above is that a downtrend line acts like a resistance line. Price action above the line would, by definition, be a ‘technical break’ over the line, which would mean a trader could expect a short term spike up and should be looking to exit short trades rather than enter them. CMC Markets | Trendlines 5
  6. 6. Figure 1.4 - Setting orders using a trendline in a downtrend, with a technical breakout In figure 1.4 you can see an example of a downtrend and trendline for most of the chart, with the ideal selling points (shown to us by the trendline) throughout the course of the downtrend. Then, as all good trends do, the trend comes to an end with the break of the downtrend line and resultant short term spike up that follows. Please note: Our platform allows you to draw your own trendlines. You can find this capability in the drawing tools section of the chart. A warning about trendlines and charts in general Changes in trend speed may necessitate the redrawing of the lines. This is particularly important if they are breached temporarily, only to resume the trend, as this could make the lines themselves unreliable. While penetrations of trendlines often warn of a trend reversal, a breach usually also means you will need to redraw a trendline. See figure 1.5 below for a graphical representation of this. It is not enough to show a trendline that works — it is important that the trend method also works. Figure 1.5 - Which trendline is the correct one? CMC Markets | Trendlines 6
  7. 7. The information contained herein / presentation (the “Information”) is provided strictly for informational purposes only and must not be reproduced, distributed or given to any person without the express permission of CMC Markets Singapore Pte. Ltd. (“CMC Markets”). The Information is not to be regarded as an offer, a solicitation or an invitation to deal in any investment product or an advice or a recommendation with respect to any investment product, and does not have regard to the specific investment objectives, financial situation and particular needs of any specific person. Contracts for Difference and leveraged foreign exchange trading involve the risk of sustaining substantial losses and are not suitable for all investors. You should independently consider the Information in the light of your investment objectives, financial situation and particular needs and, where necessary, consult an independent financial adviser before dealing in any investment product. Risk warning/disclosures and other important information are available at our website: www.cmcmarkets.com.sg or by contacting us at + (65) 6559 6000. CMC Markets does not warrant the accuracy, completeness, suitability, currency or reliability of the Information. CMC Markets accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the Information. It should not be assumed that any product evaluation or analysis techniques presented herein, if relied upon, will guarantee profits or gains or will not lead to losses. Any graph, chart or any device set out or referred to herein / presentation possesses inherent limitations and practical difficulties with respect to its use, and cannot, in and of itself, be used to assist any person to determine and/or to decide which investment product to buy or sell, or when to buy or sell them. Past performance is not necessarily indicative of future performance, result or trend. CMC Markets does not and shall not be deemed, and accepts no obligation, to provide advice or recommendation of any sort in relation to any investment product. CMC Markets may or may have expressed views different from the Information and all views expressed are subject to change without notice. CMC Markets reserves the right to act upon or use the Information at any time, including before its publication herein. CMC Markets Singapore Pte. Ltd. 50 Raffles Place #14-06 Singapore Land Tower Singapore 048623 T T F E 1800 559 6000 (local) +65 6559 6000 (international) +65 6559 6099 sales@cmcmarkets.com.sg cmcmarkets.com.sg © CMC Markets Singapore Pte. Ltd., Reg. No./UEN 200605050E. All rights reserved December 2011.

×