TRENDLINE

TREND LINES

Trend lines are universally used by almost all traders. They are a common place for all traders to begin their technical analysis. The problem is that a trader becomes too subjective in their trend line drawing. Many traders will draw on separate occasions two totally different trend lines based on the identical information, depending on his inclination each time, thus consistency and uniformity are totally lacking. Not all trend lines are correct, in the end only one is. Throughout exhaustive research, I have arrived at an effective method to select the points essential to the proper construction of a trend line. Once learned and applied, trend line analysis is no longer subjective, it becomes completely mechanical. Trend line breakouts are precisely defined and price projections can easily be calculated.

Supply and demand creates price movement. Specifically, should supply exceed demand, price declines; conversely should demand exceed supply, price advances. This is the basic economic theory accepted by all traders that creates the market. In order to illustrate this we construct an ascending line to represent demand and a descending line to represent supply. The difficulty in constructing trend lines becomes apparent when choosing the specific points to select and connect creating the trend line. As in many aspects of trading, human nature tends to interfere greatly in the proper construction of trend lines.

The first major error traders posses when creating trend lines is working from past to present, in other words working from left to right on the chart in their construction of the trend line. This is incorrect, for this reason alone; recent price activity is more significant than historical price activity. After all, the forex market is the most dynamic market in the world, meaning it is changing all the time. This approach will seem unorthodox to most trader at first, but in actuality, this is the number one mistake that traders make when creating trend lines. We are accustomed from children to read everything from left to right, correct? When drawing trend lines we must learn to read like the Japanese do, from right to left. Success in creating trend lines requires both an attention to detail and a pattern of consistency. Imprecision and disregard for detail are the common practice in creating trend lines, which will result in the construction of multiple trend lines forcing the trader to hope one of the trend lines will correctly define the trend.

The first step to trend line construction, and most important, is the selection of the two points to create the trend line with. As I stated above, when pursuing to construct a trend line we must read like the Japanese, from right to left. All trend line analysis will be done on the four hour chart compression. By process of elimination of all chart compressions, I have concluded that only the four hour compression is needed. The four hour compression generates less trend line breaks and more accurate price projections than any other time compression. All analysis shown of trend lines will be conducted of the four hour compression(TF H4).