the hAnDbook of teChnICAl AnAlysIsAssume that a chartist is interested in identifying a market top via a trendline
penetration. The chartist locates two significant troughs in an existing uptrend and
draws a line connecting the two troughs, projecting that line into the future. Price
eventually makes a top in the market and subsequently declines and penetrates the
uptrend line, signifying the formation of a market top. This seems to be a totally
objective exercise since the uptrend line and the point of penetration were clearly
marked and recorded on the charts. Unfortunately, the objectivity ends here. Al-
though each act of identifying the trend reversal was purely objective, the variables
upon which the process of identification is based is determined subjectively by each
chartist, according to their goals, biases, experience, and preferences. Another char-
tist could well have drawn a steeper trendline and declared that the penetration of
this new trendline marks the true point of reversal in the market. As you can see,
although each act of identifying the exact point of reversal is strictly objective in
itself, the existence of alternative trendlines introduces an element of subjectivity
as to which trendline penetration is the definitive indicator or signifier of the trend
reversal. We can find another example of this subjective objectivity. Automated or
program trading is usually regarded as a purely objective mode of trading where
all the rules of engagement with the market are fully codified and mechanically
executed. This removes all subjectivity with respect to the entries and exits. Just as
in our previous example, the point of penetration of each trendline was also purely
objective. However, should the automated trading software allow for some param-
eter adjustments, this instantly introduces an element of subjectivity as to which
parameter adjustments are the definitive settings for a profitable trading campaign.
Therefore, no matter how objective each individual act is, once the possibility of
alternative acts exists, the issue of subjectivity arises. In a sense, each determination
is individually objective, but collectively subjective.
The very act of determining the exact entry point to initiate a trade is some-
what subjective. Let us assume that a trader is interested in initiating an entry at
the break of an uptrend line. Price initially fails to exceed a previous peak, which
is a bearish indication. Price subsequently declines and breaches the uptrend line,
and in the process triggers a trade. Some questions that a trader may now ask are:
■ (^) At which point after the breakout do I initiate an entry into the market?
■ (^) What is a reasonable amount of price penetration required before an entry is
initiated?
■ (^) Do I wait for the penetration bar to close first or do I initiate an entry at some
arbitrary point during an intraday violation of the trendline?
■ (^) What if the penetration bar closes too far away from the original trendline
breach?
■ (^) How would I know if the violation is merely a false breakout?
■ (^) Should I allow for a larger penetration before initiating an entry in order to
filter out potential false breakouts? If so, how much larger a penetration is
required to filter out such breakouts?
The answers to all of these questions really depend on the objectives of the
trader and what he or she is attempting to achieve. There are essentially two ways