What's about trendlines

Rule: Price piercing through a trendline signals a trend change. In reality, the initial piercing of a trendline is only a warning of a possible trend change. In a study I saw recently, it was found that if you sold when the price first pierced the trendline, you would be selling too soon in nearly two out of three trades. This suggests that you should not rely on the trendline to be your only signal of a trend change, but as a first warning.

Rule: The more price touches a trendline has, the better the line is. When we define a touch as the closing price, this rule does generally hold up. One of the interesting things I have found is that the down sloping trendline tends to be stronger than an up sloping one.

Rule: Long trendlines perform better than short ones. This one just makes sense on the face of it. The longer the trend is in place, the better the stock performance is. The study I mentioned earlier suggests that trendlines that last more than about 140 days have about a 10% better return rate for the trader than shorter ones.

Rule: Shallow trendlines perform better than steep trendlines. This is a bit subjective because it deals with the perceived angle of the trendline. It is thought that a stock that is going up at a steep angle cannot continue that trend for as long as a stock that is having a steady, slow increase. In the study I have been citing, this rule was validated, with the shallow trending stocks averaging about 50% more increase over time than stocks with a steep uptrend angle.

Bottom Line – Today we touched on just a couple of aspects of trendlines. My best advice if you are new to trendlines is to read up as much as you can on them and then go out and start drawing your own lines. The best way to get good at them (as with anything else) is to keep doing then over and over. Trendlines can be a great tool to help set trading entrances and exits, so learn to use them. Good luck and good trading.