Basic trading using trendlines

[grah33]

i'm getting use to all this but would like some clarification . say i'm interested in buying in some stock that is currently trending upward - eg cba. i draw the trendline , and it's still going up, but HOW DO I KNOW WHEN TO COME IN? the price may not necessarily go down to the line and bounce off it in the near future.

say i'm already in and the trendline is broken some time later on. if i see volume and the price breaking lower than the trendline, is that the time to sell, or should i wait and see - a ranging time may occur which is followed by another up trend. basically when would i sell and what volume effect would i be looking for.

i'm more intersted in using basic volume at this point rather than indicators, as i need to understand what kind of volume i'm looking for before i can understand what the indicator is telling me.

i've been looking for this answer but not found it yet. hoping to get a quick answer and save some time. hope my question doesn't bother anyone. thanks.

 

[Gordon7]

Hi grah,

I'll give some of my own general guidelines and approach for you.

From experience trading off a trendline can be one of the most profitable and less demanding methods of trading stocks. Make it simple. You don't need to rely on volume and indicators for this in my opinion. Just visually check the stock is in an uptrend (refer to the surrounding price action).

I would take a trade with a move or bounce off of the trendline. For me this can sometimes simply mean a move above the high of the day that the stock hit the trendline, or a break through a short term downsloping trendline produced as the stock retreated to the trendline (the gentler the better !). At this stage I am unlikely to have a price target nor do I need one.

If you want to look for an entry within the price action itself above the trendline then I would say look for any chart pattern that is valid in its own right. The only difference here is that the chart pattern happens to occur within the context of an uptrend. However, if your stop is to be based on the upsloping trendline then you need to ensure that your stop loss is not too far away, otherwise you might as well play the chart pattern in its own right.

As a general rule I would place a stop loss on an end of day close below the trendline that is not immediately recovered the next trading day.

The break of an established trendline means for me that a change in trend is now likely and can lead to, just about anything. Perhaps it will be sideways wide ranging action (horrible to trade within until a pattern emerges) or it could mean an immediate move to the downside, or maybe it does trend higher still (but even then it can be in a different manner to the original uptrend.

If anyone finds anything I wrote above of interest I could provide practical examples when I have time.

 

[Julia]

Gordon, I'm always interested in any comments from people using trends, and thank you.

 

[CanOz]

Interesting discussion. I tend to use trend lines to provide context and while i would use them in pattern trading EOD futures and equities, i don't use them much when i intra-day trade....the reason for that is that i had developed (with the help of a coder) an auto trend-line trading system that ran on NinjaTrader. The system worked quite well in terms of identifying the intra-day trends, it was quite variable. It could not be profitable however as there was no 'edge'. I tested it for weeks on on all kinds of markets and while it had some great moments and it was a fascinating learning process, it was not a profitable method to trade on its own.

That said, there are always lots of stops around trends lines, so sometimes its a bit self fulfilling and the resulting stop run can be the catalyst for a new trend....

Useful but not profitable on their own is my experience.

Cheers,


CanOz

 

[Gordon7]

To help illustrate my method of trading trendlines, I thought I would want to do this in close to real time as possible because it’s too easy to do this in hindsight and find great looking clear cut examples.

Please Note – I may or may not trade any of the 4 following stocks I cover below. I consider all 4 stocks to be at least in an intermediate term uptrend.

Who knows, all 4 candidates may never have their entries triggered or all 4 could be triggered and quickly fail. The stop loss however, in all cases is theoretically small. The 4 candidates are SGH, SHJ, TNE and VOC.

My charts and comments are as of end-of-day Monday. I may not be able to get all my analysis with charts up before the market opens or even today.

Before I will even place a trade I make an assessment of the current trading environment for the type of stocks I am interested in. These days because of the big divergence between the performance of Mining vs Industrials I base my decision on the XNJ (maybe one or two other indices) rather than the XJO. My focus here is on some Industrial stocks. I also place importance on a technical outlook for the US market.

My current outlook is Neutral, meaning I want better than average trading candidates.

 

[Gordon7]

SGH

(Blueish circles are my past entry points according to my trading strategy).

My trendline is drawn from the October lows.

Positives
– Possible early entry into an ascending triangle. I don't consider the false break as a complete failure of this pattern yet in the context of its size. We will know soon enough !

Negatives
- The spacing between hits is too small indicating this could be a struggling and hence vulnerable trend (though this may still be an ascending triangle type pattern in development)
– There was a false break to new highs.
- The pullback off the highs has been too swift for my liking. In this case I would ideally want to see some short term consolidation before a move back upwards.
– Heavy resistance around $6.50 and some minor at $6.30

My assessment – definitely wait until (if) price is able to move back towards $6.50 and then re-assess.

 

[Gordon7]

SHJ

Positives
– A longer term trendline with good spacing between hits.
- The last month has seen both a neat and gentle retreat allowing for a clear cut entry point based on the break of the down sloping short term broken trendline.

Negatives
– Daily average $ value of trades is a bit too low some days for my liking.

My assessment – a better than average candidate but may reduce trade size due to low daily volumes.

 

[Gordon7]

TNE

I consider the false break in December of the trendline to be almost significant, also taking into account last week’s ‘crawl’ along it reconfirming it as remaining valid in my opinion.

Positives
– A longer term trendline with good spacing between hits.
- The last month has seen a gentle retreat back to the trendline. The entry point is clear, though I would not enter before the possible resistance line at $3.10 is also broken.

Negatives
- Significantly, there have been 2 bubble-type impulsive moves in prior months which has lead to increased volatility (which is not a good sign).
- Related to the previous point, this may be in the process of shaping up into a multi-month (hard to trade) sideways pattern.

My assessment – Neutral on this one and with me wanting better than averages candidates would pass.

 

[Gordon7]

VOC

Positives
– Overall strong longer term uptrend with no indication of reversing any time soon.
- The last month has seen both a neat and gentle retreat allowing for a clear cut entry point based on the break of the broken looking trendline.

Negatives
- The spacing between hits is too small indicating this could be a struggling and hence vulnerable trend.

My assessment – Whilst the spacing is a negative, the overall trend is strong and should it continue as such this would seem like a good entry point on the break above the broken trendline.

 

[Julia]

Before I will even place a trade I make an assessment of the current trading environment for the type of stocks I am interested in. These days because of the big divergence between the performance of Mining vs Industrials I base my decision on the XNJ (maybe one or two other indices) rather than the XJO. My focus here is on some Industrial stocks. I also place importance on a technical outlook for the US market.

My current outlook is Neutral, meaning I want better than average trading candidates.

Thanks, Gordon7.

Could you expand at all on "an assessment of the current trading environment....." above in stock selection?

Do you take into consideration such as debt levels, yield, increasing year on year performance etc?

Any particular time frame?

 

[susie19]

thanks for sharing Gordon...interesting to see other people's take on charts. and Grah, no dramas with questions - you gotta start somewhere. just know what you can afford to say goodbye to, in the learning process, and 'happy trading'.

 

[pixel]

i'm getting use to all this but would like some clarification . say i'm interested in buying in some stock that is currently trending upward - eg cba. i draw the trendline , and it's still going up, but HOW DO I KNOW WHEN TO COME IN? the price may not necessarily go down to the line and bounce off it in the near future.

say i'm already in and the trendline is broken some time later on. if i see volume and the price breaking lower than the trendline, is that the time to sell, or should i wait and see - a ranging time may occur which is followed by another up trend. basically when would i sell and what volume effect would i be looking for.

i'm more intersted in using basic volume at this point rather than indicators, as i need to understand what kind of volume i'm looking for before i can understand what the indicator is telling me.

i've been looking for this answer but not found it yet. hoping to get a quick answer and save some time. hope my question doesn't bother anyone. thanks.

Hi Grah;
you started an interesting question and already received a number of valuable answers.

In the interest of simplicity, would it be feasible to sell your holding once the rising trendline is broken?
In the event of a false break, you can always buy back in as soon as it becomes clear that this is indeed a "false break". It may cost you a pip and brokerage, but it reduces the risk of staying in a losing trade. Only you can gauge whether the stock(s) you trade are more likely to keep falling or to recover after a break.

Another consideration, one that I like to apply, is the use of channels:
I draw a trendline that runs parallel to the rising support line at a distance determined by interceding tops. When the price approaches the upper channel, I tend to take at least part profit - again on the basis that it's better to lock in profit at a likely turning High point.

Nor do I stop at strictly linear channels, but prefer price-following "envelopes"; but that's outside the scope of your question, so let's keep it simple

 

[tech/a]

Gordon Have you had a look at volume at Trend line support/or break.
Have you noticed any helpful hints within patterns from the incorporation of volume and or range?

 

[Gordon7]

Hi Julia,

Could you expand at all on "an assessment of the current trading environment....." above in stock selection?

My assessment is based on the chart indices. Quite simply, I use a combination of tools such as the guppy multiple moving averages (with different ma values), an indicator or two, a 125 day exponential ma for the longer term time frame, trendlines etc... I do this mostly on the SPY for the US market, and the XJO, XNJ, XSO and from time to time other indices in our market - whatever I feel may be relevant.

I don't want or need to unnecessarily complicate this. I simply want want to be able to quickly assess if I consider the market backdrop to be bullish, bearish (and degree thereof) or neutral.

Do you take into consideration such as debt levels, yield, increasing year on year performance etc?

Any particular time frame?

My trades will basically last for days to weeks, months if I'm lucky enough to latch onto a good thing (though I have a habit of taking the money and run too often for my own good).

I have used/studied fundamentals and subscribed to a number of fundamental services over the years. I could not find any meaningful correlation between share price movements and the fundamentals of a stock including broker concensus targets, that would provide an edge for the sort of time frames I usually will hold a trade. In other words, I find no advantage in trading stocks with a good set up provided they have good fundamentals vs a good chart set up ignoring fundamentals. It's the time frame that is key here.
For instance, I closed a trade on ACR on Monday with a net of 17% gain after holding it for just 3 days based purely on the chart pattern (okay, that is not so common these days). I have no idea of its fundamentals but I doubt they are great.

The stock Yield in itself is an interesting dynamic. A stock with a good yield and franking credits (more likely the larger caps and principally the major banks and Telstra) may have a run up in price in the 45 days (give or take) leading up to their ex-div date. Something to take into consideration but I take this even further. I also take into account any stock that is about to go ex-div with a good yield and may avoid a trade I otherwise would have made. There is a possibility of a sharp sell after going ex-div, well beyond the dividend amount. Perhaps it may not affect the overall trend but may negate an otherwise tradeable chart set up.

Hope the above answers your questions. It just represents my trading approach/philosophy to trading the market.

 

[Gordon7]

Gordon Have you had a look at volume at Trend line support/or break.
Have you noticed any helpful hints within patterns from the incorporation of volume and or range?

Hi tech/a,

I place little significance on volume. I rely heavily on the price action. I just don't find volume a significant factor at all in trading on the ASX. I know that's a controversial thing to say. I don't deny that for other markets volume may well play a significant role.

You or other traders may have found that edge with the ability to read volume in our market. Sorry to say I haven't.

 

[tech/a]

Hi tech/a,

I place little significance on volume. I rely heavily on the price action. I just don't find volume a significant factor at all in trading on the ASX. I know that's a controversial thing to say. I don't deny that for other markets volume may well play a significant role.

You or other traders may have found that edge with the ability to read volume in our market. Sorry to say I haven't.

Fair enough.
You certainly don't need volume to trade particularly charting as you do.
I think the thing is the ASX. Super liquid instruments you may find a little different.

But even so my experience with the ASX stocks when I traded them was----

I can ride a bike in one gear as well.
Or Play golf with only a 5 iron.

You must be a Guppy fan!

 

[Gordon7]

You must be a Guppy fan!

Not as such. Just believe there is value in the use of mmas in context with my trading style.

 

[Julia]

Gordon7, thank you for comprehensive response - much appreciated. From that I'm on a similar track but with a longer time frame and looking also for cash flow via yield.

Hope you'll keep the posting up.

 

[grah33]

still reflecting on all this... there is a lot to take in

 

[burglar]

still reflecting on all this... there is a lot to take in

Take what you learn and Dovetail it with what you know.
Take baby steps.

Don't be in a hurry to do your money.
The market will wait for you.