Trading with Trend Lines

If there is one tool that outperforms all others accross all timeframes, it would have to be trend lines.  Many people want a simple method that can be used the same way, whether they are looking at a long term monthly chart, or a short term daily or intra-day chart.  Trend lines, when drawn properly, certainly fit the bill.

Here are the main benefits:

1:   Trend lines are very easy to draw and trade with once you know the rules.

2:  They will generally get you in earlier and out sooner than many moving average combinations.

3:  Trend lines provide a great insight as to where the market is likely to find future support or resistance.

4:  You can use trend lines to gauge how much momentum a trend has, and whether it is about to stall and reverse.

5:  You can use trend lines to trade on a chart with just the price bars (and a volume histogram if you prefer) – no fancy mathematical formulas or indicators required.

 

How to Draw a Trend Line for High Probablility Trading

This method is smilar to that of Market Wizard Victor Sperandeo, a method that helped him to earn 70% p.a. in his prime.  Please make sure you have a solid knowledge of the basics, especially identifying peaks and troughs before reading on.  If you’ve got that, then let’s begin!

1:  To draw a downtrend line, you must start from the highest peak and draw down, not going through any peaks in between.  Therefore, you must have at least two peaks.

2:  Alternatively, to draw an uptrend line, you must start from the lowest trough and draw up, not going through any troughs in between.  Therefore, you must have at least two troughs.

3:  Think that’s easy?  There is one more thing.  You can pivot a new, steeper trend line off your initial trend line at any time, provided you have at least the minimum two peaks or troughs.  Making a steeper trend line will follow the trend as it gathers momentum, and get you in or out of a trade sooner.

 

Two Different Methods for Buying and Selling with Trend Lines

1:  Buy on two closes above a downtrend line, and sell on two closes below an uptrend line.

2:  Buy when price closes above a downtrend line and above the previous peak.  Sell when price closes below an uptrend line and below the previous trough.

 

As always, I find a picture says a thousand words.  Click this picture to enlarge:

 

Trading with Trend Lines - Click to Enlarge

Trading can be as easy or as complicated as you want to make it – and using trend lines on any time frame is just one way to simplify your approach to the stock market.   After all, trading is about creating a lifestyle, not taking away from it!  As always, try it out for yourself by backtesting on a few charts.  Don’t forget your stop loss and trade management, and if it works for you, use it!  It’s your hard earned money after all.

 

 

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June 11, 2009  Tags:   Posted in: Free Trading Course Lesson Backlog

3 Responses

  1. Marcus - August 3, 2009

    It’s really nice to have a resource I can quickly flick back to to brush up on the basics when I’ve been out of the share buying game for a while! Thanks!

  2. Dave McLachlan - August 3, 2009

    My pleasure Marcus – stop by anytime, and if you have any questions at all, feel free to drop me a line – I’m happy to serve.

  3. ASX CANSLIM Current Growth Stocks | ASX Market Watch - April 9, 2010

    [...] in or of themselves – it might be a good idea to put them on your watchlist and look for a Trend Line entry or Dow Theory entry signal, and always keep a solid stop loss in place once you enter.  [...]

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