Why do we use trendlines? Is there any proof that trends move linearly?

Beginner Questions
#1

Trendlines are an elemental aspect of technical analysis. As I’m sure we’re all aware, the idea here is that we may identify a trend - and attach a (non-horizontal) line to show the rate at which price is increasing or decreasing. For example, consider the following chart:


I’d say that this is clearly a down trend, since all consecutive peaks are lower than the last. However, there is no linear trendlines that accurately fits this trend. As such, one would probably end up redrawing their trendline for this trend many times as new price data appears.

I see no logical reason why price trend should have linear gradients. As such, I’m curious as to why we draw linear trendlines? Furthermore, I’m interested in why we think that a trendline break may signify anything? Surely, if price keeps making lower peaks - the trend is still bearish, regardless of whether a subjectively drawn straight line is broken?

#2

[QUOTE=“JRC;760203”]Trendlines are an elemental aspect of technical analysis. As I’m sure we’re all aware, the idea here is that we may identify a trend - and attach a (non-horizontal) line to show the rate at which price is increasing or decreasing. For example, consider the following chart: <img src=“301 Moved Permanently”/> I’d say that this is clearly a down trend, since all consecutive peaks are lower than the last. However, there is no linear trendlines that accurately fits this trend. As such, one would probably end up redrawing their trendline for this trend many times as new price data appears. I see no logical reason why price trend should have linear gradients. As such, I’m curious as to why we draw linear trendlines? Furthermore, I’m interested in why we think that a trendline break may signify anything? Surely, if price keeps making lower peaks - the trend is still bearish, regardless of whether a subjectively drawn straight line is broken?[/QUOTE]

Issac Newton. 3rd law. “For every action there is an equal and opposite reaction”.

#3

One thing that struck me when I was studying at the Pipschool was that many of the patterns we traders look for, pennants, head & shoulders, fibs, trendlines, etc, only really are significant because so many traders use them as buy/sell points that they become self-fulfilling.
On that basis alone they are fairly predictable and can be used to our advantage, at least in theory.

#4

You could just use a moving averages set or Bollinger Bands for a more ‘elastic’ view of trends, as an alternative to the more linear approach of trendlines and channels.

What do you think?

#5

You can draw several trend line on your chart and they all will be correct. Firstly trend moved slowly, but then started falling faster and you had to draw new trend line. The best way for understanding how the perfect trend lines could be, open any financial instrument and draw, draw, draw…
You will see the power of technical tools like trend lines.

#6

Sorry, but this is simply isn’t so: technical tools, in themselves, have no “power” over the market’s price movements; your statement is both meaningless and misguiding, at a very basic level - and I’m saying that as a technical analysis trader, myself.

A horizontal trendline break signifies that a former/recent level of the balance between buying pressure and selling pressure has been overcome by the weight of either current buying or selling pressure, and that matters because the imbalances between buying and selling pressure are the sole mover of market prices.

It would help you to read anything really introductory about support and resistance, what they signify in the markets, and what traders should or can do with/about them. (Personally I recommend Joe Ross’s classic beginners’ book, [I]The Law of Charts[/I] - of which you may manage to find a free PDF copy online if you search. I’m sure there also more modern equivalents, but whether they’re as good or as clear, I don’t know.)

#7

Power of technical tools in meaning that price “see” trend lines, levels, and that’s why these tools are impotent. If you are technical trader you must know it. And trading systems based on these technical instruments are rather profitable and good for novice traders. And this forum, I think, for discussion. But not for promotion only one point of view.

#8

JRC, in your chart example you are showing one of the most powerful trade signal there is. After price broke your blue trend line and put in a new low, price then retraced the entire move lower right back to the trend line where former support now becomes resistance and price is rejected setting up a much deeper move lower. This is why I tell people, Don’t Chase the Breakout price has a way of coming back giving you a second chance to enter the trade with a bigger reward. In trading good things happens to those who have patients

#9

I believe that base the analysis only on the trend theory - is unsafe. In order to determine the location of the breakdown of the trend, or the place of beginning, you need to use other tools (patterns, wave analysis …), indicators (Bollinger, moving average, etc.)

#10

What?
May you please elaborate?

#11

if its a basic question of do trend lines help u make money, then yes, its a matter of statistics, anything that can generate more than 50% chances then its good and usable.

#12

I was just referring to what most people (slightly mistakenly, in my opinion) call “supply” and “demand”: call me pedantic, but it’s always seemed to me that “buying pressure” and “selling pressure” are more accurate and less misleading terms. :33:

#13

[QUOTE=“lexys;760404”] I was just referring to what most people (slightly mistakenly, in my opinion) call “supply” and “demand”: call me pedantic, but it’s always seemed to me that “buying pressure” and “selling pressure” are more accurate and less misleading terms. :33:[/QUOTE]

I concur. The market is nothing more than the constant contraction (pressure) and (release) expansion of pressure.

Now turn that into a trade and we’re cooking with bacon.

#14

Most of the times i see the moves in the markets are in the tight ranges and this is why we have to clearly under see the trends in the markets before opening up our orders…

#15

That is true, but I ask the question more out of interest than to change the way I trade. I’m more interested in the logic behind using linear trendlines - rather than alternative ways to do this.

#16

I understand the logic behind the breaking of horizontal lines - we simply think of them as areas of supply and demand.

What I was asking is whether it actually signifies anything if a diagonal trendline is broken?

#17

Count me in: breakfast is the most important meal of the day.

#18

Well in my opinion it does not signify anything. Pure mindgames and something to give hope to an average trader :rolleyes:

#19

If we are unable to understand the real trends in the currency then trading will not be profitable to us and we have to first devote our time in doing that…

#20

Markets are all about trend, in 2009 had you recognized the trend of people trading in their Blackberry’s for IPhones you would had bought stock in Apple and sold short Research in Motion, that would had made you a killing. Today we see oil prices trending higher, that has the Canadian dollar the strongest currency, and USDCAD in a major down trend. The trend is your friend