The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

(sohrab1953) #1

Trend Analysis


rather interesting. We yet again observe the problems with defining price action.
The best way to resolve this dilemma is as follows:

■ (^) Use only price‐based filters and avoid time‐ and event‐based filtering. This
would allow the trader to decide exactly how much price excursion is required
to represent a valid penetration of a trendline, or for that matter, any price bar-
rier. Even if the amount of price excursion fails to be recognized as a valid pen-
etration, this does not mean that a new trendline cannot be drawn. The trader
will monitor price reactions at both the original and newly drawn trendlines.
■ (^) Use double‐stage filtering when employing time‐ or event‐based filters to
gauge valid trendline or price barrier penetrations. As long as the second filter
is price based, the trader would be able to identify a valid penetration once
the price exceeds a specified price. As before, this does not preclude the draw-
ing of a new trendline, even if the intraday or intra‐period penetration has not
exceeded the second filter’s validation price.
elements of trendline reliability
What constitutes a reliable trendline? Quite simply, a reliable trendline may be de-
fined as a trendline that provides consistent support and resistance to price action.
A trendline that experiences a lot of whipsaws is considered unreliable.
Factors influencing trendline reliability include:
■ (^) Angle of trendline: A steep uptrend, that is, above 45 degrees, is usually regarded
as less stable and may not be able to sustain itself over the longer term. Any trend-
line associated with such a trend is therefore deemed less reliable. A weak trend
with a very shallow angle of ascent is also regarded as less stable and any trendline
associated with such a trend is also deemed less reliable. The most reliable uptrend
line is one where it the angle of ascent is approximately 35 to 45 degrees.
■ (^) Duration of trendline: Longer‐term trendlines are generally regarded as more re-
liable than shorter‐term trendlines. A longer‐term trendline would have been in
the market for a much longer period of time and would be more obvious to all
market participants, be they short‐, medium‐, or longer‐term traders. As such, a
longer‐term trendline will attract a larger number of buy orders above it and sell
orders below it, and in the process transform into a stronger and more significant
barrier to price. This makes longer‐term trendlines more reliable. Longer‐term
trendlines also attract the institutional players, resulting in larger orders placed at
the trendline, giving rise to a stronger inhibiting effect with respect to price.
■ (^) Number of price retests: The greater the number of retests a trendline experi-
ences, the more indicative it is that traders are aware and paying attention to
a trendline. Such a trendline will normally attract more orders around it as
traders realize that it is rejecting price in a consistent manner.
■ (^) The clarity of the price retests: The more precise the retest, the more indicative
it is that the market participants are aware of such a trendline. As before, this
will attract more orders around the trendline, making it a more formidable
barrier to price.

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