Using trendlines isn't a science. Everyone will likely draw them differently based on how they trade and what time frame they are looking at.
Even though drawing trendlines may not be an exact science, when using them, we should try to base them on logic as much as possible, otherwise, our trendlines will be random and produce random trades.
Implement guidelines on how you will draw them. I do trade based on trendlines frequently, and often my losing trades are a result of having drawn a trendline improperly, failing to realize the price structure had changed and not accounting for that.
If our trades are random, then it is very hard to improve our trading, because the input we are using has a problem with it. We may take a "perfect" trade based on our trendline, but if our trendline was based on a false premise or wishful thinking—instead of how the market is actually moving—then we will have more losing trades.
Ask yourself, "Are my trendlines logical? Is the market showing a tendency that I am highlighting? Am I highlighting a trend or pattern? Have I segmented the price action and am I focusing on the correct structure(s) for my time frame?"
The answer to all these questions should be YES!
The same concepts apply to any timeframe. As discussed in the regression channel article, we may have a large descending channel/downtrend, but within it we have smaller uptrend trends and downtrends. All are relevant, and the great trades may occur when two of these channels intersect. We only see those points, though, if we have drawn our trendlines in a logical way, looking at the overall price structures and smaller price structures that are affecting our trades.
Common Trendline Mistakes, and How to Fix Them
Many people connect a couple highs or lows and extend the line off to the right, and then hope that the price will magically bounce off the line in the future for a huge trade.
As discussed above though, we need to ask ourselves what price structure that trendline was based on, and is that structure still relevant? This can still be subjective. We may not always agree, but the point is to improve on how YOU see the market, and make sure that you are drawing trendlines that make logical sense to you.
The EURUSD chart below shows several blue trendlines. I view these as legitimate trendlines, based on the price structures and trend analysis.
There is also a red trend line on the chart, which is a common mistake people make. The price action near where the red trendline started has no resemblance to the price action once the blue lines start. The red line was useful on the left of the chart; it marked the start of the uptrend. But that trendline became obsolete once the price drastically accelerated to the upside and didn't pullback to the trendline.
There is very little evidence to suggest that the price will respect the red trendline when the price comes back to it. Taking a trade at this level would be random, like flipping a coin. Performance based on randomness is very hard to improve upon.
While this is just one example, hopefully, it shows how price structures change and we have to adapt to them. We can't assume that because a trendline worked for a little while it will work again in the future if the price has shown a totally different tendency in the meantime.
The goal is not trendline perfection, because it is subjective any time we manually drawing something. The goal is improvement. To start seeing the tendency in price, and capitalize more effectively on those tendencies.
As I see examples of faulty trendlines, possibly of my own making, I will continue to add examples to this article.
By Cory Mitchell, CMT. Join the discussion in my free Facebook swing trading group.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.
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June 21, 2020 at 07:13AM
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How to Draw Trendlines That Actually Help Your Trading - TheStreet
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