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Trends and Trendlines
Trends and Trendlines
Trends and Trendlines
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Albert Yang
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Copyright Notice
All contents copyright 2008 by Albert Yang. All rights reserved. No part of this document or the related files may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording, or otherwise) without the prior written permission of the author.
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Legal
Limit of Liability and Disclaimer of Warranty: The author has used his best efforts in preparing this book, and the information provided herein is provided "as is." The author makes no representation or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaims any implied warranties of merchantability or fitness for any particular purpose and shall in no event be liable for any loss of profit or any other commercial damage, including but not limited to special, incidental, consequential, or other damages. Trademarks: This book identifies product names and services known to be trademarks, registered trademarks, or service marks of their respective holders. They are used throughout this book in an editorial fashion only. In addition, terms suspected of being trademarks, registered trademarks, or service marks have been appropriately capitalized, although the author cannot attest to the accuracy of this information. Use of a term in this book should not be regarded as affecting the validity of any trademark, registered trademark, or service mark. The author is not associated with any product or vendor mentioned in this book.
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attempt has been made to assure accuracy, we are not providing any express or implied warranty as to the accuracy of the content. We do not accept any liability for error or omission. Examples are provided for illustrative purposes only and should not be construed as investment advice or strategy. No representation is being made that any account or trader will or is likely to achieve profits or loses similar to those disclosed in the ebook. Past performance is not indicative of future results. By purchasing the ebook, subscribing to our mailing list or using the website you will be deemed to have accepted these terms in full. Price Action Forex, www.priceactionforex.com, Albert Yang, the website, ebook, and their employees, officers, directors, shareholders and representatives are not intending to either provide investment advice or invite customers to engage in investments through this ebook. We do our best to insure that the website is available 24 hours per day but we shall not be responsible for any damage or loss of any third party if for any reason the site is not available at any particular time, or at all. The information provided on this ebook is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject us to any registration requirements within such jurisdiction or country. Hypothetical performance results have many inherent limitations, some of which are mentioned below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example the ability to withstand losses or to adhere to a particular trading program in spite of the trading losses are material points, which can also adversely affect trading results. There are
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numerous other factors related to the market in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. We reserve the right to change these terms and conditions without notice. The content of www.priceactionforex.com and this ebook are copyright and may not be copied or reproduced. No parts of the ebook or any of its components may be resold. They are for individual use only and may not be passed on in any form. Affiliated sites, linked sites and advertisements This website expects its partners, advertisers and affiliates to respect the privacy of our users. Be aware, however, that third parties, including our partners, advertisers, affiliates and other content providers accessible through our site, may have their own privacy and data collection policies and practices. For example, during your visit to our site you might click a link to, or view as part of a frame, page, certain content that is actually created or hosted by a third party. Also, through this website you may be introduced to, or be able to access, information, Web sites, features offered by other parties. We do not accept any liability for any actions or policies of any such third parties. You should check the applicable privacy policies of those third parties when providing information on a feature or page operated by a third party. While on our site, our advertisers, promotional partners or other third parties may use cookies or other technology to attempt to identify some of your preferences or retrieve information about you. For example, some of our advertising is served by third parties and may include cookies that enable the advertiser to determine whether you have seen a particular advertisement before. Other features available on our site may offer services operated by third parties and may use cookies or other technology to gather information. We do not control the use of this technology by third parties or the resulting information, and we do not accept responsibility for any actions or policies of such third parties. You should also be aware that if you voluntarily disclose personally identifiable Information on message boards or in chat
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areas, that information can be viewed publicly and can be collected and used by third parties without our knowledge and may result in unsolicited messages from other individuals or third parties. Such activities are beyond our control and we do not accept any liability for any consequences resulting from any such activities.
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A lot of work that went into putting this document together. I can't tell you how many countless hours were spent putting together the information. That means that this information has value, and your friends, neighbors, and co-workers may want to share it. The information in this document is copyrighted. I would ask that you do not share this information with others-you purchased this book, and you have a right to use it as you see fit. Another person who has not purchased this book does not have that right. It is the sales of this valuable information that makes it possible for me to continue to write and sell ebooks at a cheap price. If enough people disregard that simple economic fact, future ebooks will be at ridiculous prices, assuming there are future ebooks at all. If your friends think this information is valuable enough to ask you for it, they should think it is valuable enough to purchase on their own. After all, the price is low enough that just about anyone should be able to afford it. If you cant afford this book, you shouldnt be trading, simple as that! It should go without saying that you cannot post this document or the information it contains on any electronic bulletin board, website, ftp site, newsgroup, discussion board, forum, bbs or any sharing items like bittorrent, emule, edonkey etc. The only place from which this document should be available is the website http://www.priceactionforex.com.
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Table of Contents
Copyright Notice ......................................................................................................2 Legal .............................................................................................................................3 High Risk Investment Warning ..........................................................................4 Sharing this Document .........................................................................................8 Table of Contents.....................................................................................................9 Introduction and Forward by the Author .....................................................10 Forex .......................................................................................................................... 11 Base Theory of Price ............................................................................................12 Reading a Price Chart ..........................................................................................13 Opens and Closes ..................................................................................................14 Price Fractal Theory..............................................................................................15 Slope Theory ...........................................................................................................16 Definition of a Trend .............................................................................................17 Price Trendline Definition ...................................................................................18 Obvious Trends, Trendlines for Obvious Trends ........................................34 Unanswered Questions........................................................................................37 FGAs (Frequently Given Answers) .................................................................38 Conclusion ................................................................................................................39
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Thank you for buying this ebook. This is an ebook that will introduce you to trends and trendlines unlike any other presentation before. Please do not let the terse content fool you; you should never judge a book by its cover, nor should you just an ebook by its byte-size. A lot can be said for brevity, I have thought through most of this, and have distilled it down to its fundamentals. This book will help those who are trend traders, and every other type of trader out there. It has been my frustration that so many books talk about trend trading yet never define a trend. I liken it to the Infinity car commercials when they first came out, they advertise a car but never showed the car. I use to give the authors the benefit of the doubt, perhaps they had some sort of goal, for us to understand and discover what a trend is on our own. Perhaps it is the thousands of hours I have poured over their books; or the email conversations with quite a number of them that I have become a cynic, in deep belief that they dont share it because they dont know it! Next time you meet a trader who tells you to give them your hard earned money so they can trade for you, ask them to define a trend, and watch them pontificate on this and that, not giving you a straight answer because they themselves do not know. You might not agree with the contents of this book, but I assure you there are very few books (as of this writing, I know of none) that even makes a digestible attempt at not only defining a trend, but giving you a mathematical basis in which to draw trendlines, and a good deal of confidence in the trendline you draw. I hope you enjoy reading this book as much as I enjoyed writing it.
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Forex
I have written this for the Forex (Foreign Exchange) market, but the information contained herein is not exclusive to Forex. Everything I cover in this book is applicable to every market. In fact, I will go ahead and admit something that most of you will find ridiculous. Because I am a 100% technical analyst, I actually dont care if I am trading EUR/USD, corn, gold, pork bellies, Microsoft stock, or anything else. It is the chart that I look at, and nothing else. Most of the time, I trade without even knowing what underlining item Im looking at. This reduces my bias, and makes me a 100% technical analyst. I have tested all of this with stocks, bonds, futures, and of course Forex. So this is applicable to any and all underlining items. But please understand that as with the warnings I posted above, if you have no clue, what you are doing, then you should not be trading, regardless of instrument. Forex offers demo accounts and I highly recommend trading with them until such time your skills and judgment have reached the realm of profitability.
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Slope Theory
This is where we get into the math. Given slope as defined by y=mx+b Then, an upward trend HAS TO HAVE slope > 0. Corollary: A downward trend HAS TO HAVE slope < 0 The two statements above, HAVE TO BE TRUE by mathematical definition. Only 2 points are needed to determine a slope. Because we believe that current price discounts everything, current bars high and low then will always be used as one of the end points. The other endpoint then will be the absolute high and absolute low on the chart, thus giving us 2 points in which to base our trendline drawings. (Remember, price is fractal, especially with respect to charts showing past price, so the other end point will depend purely on how zoomed in or zoomed out you are on the chart.)
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Definition of a Trend
Because a trend is defined as that which has a slope that is non-zero; we can then write the most simple of definitions for a trend. Uptrend ~ An uptrend is when the price makes higher highs, and higher lows. Downtrend ~ A downtrend is when the price makes lower highs and lower lows. We know this definition to be correct because without the higher high, a slope will never be > 0, and without a lower low, we know that a slope will never be < 0. An uptrend then, leaves a set of higher lows in its wake, thus giving us support lines. A downtrend leaves us a set of lower highs in its wake, thus giving us a resistance line.
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If a trendline is to be drawn, by definition of slope, a downtrend must have one end point at the highest high point in the graph. Otherwise, an upward slope is impossible.
No correct trendline which is drawn up to the current price, can cross a price between the two points used to draw the line. If a price bar is already crossed by the time it gets to the current price point, how can it then be considered a trend?? This is worth reading a few times, and highlighting with a marker. This is the mathematical crux of drawing a correct trendline. Because a trend is defined as slope, we have to then assume that the correct trendline is the slopeline drawn in which is defined as: The least steep line in which links a highest high or lowest low to the current price point, without crossing any bars between the two points.
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More importantly, it is the line which connects the highest high, to the current high of the current bar, and the lowest low to the low of the current bar without bisecting any bars in between. Because we do not deal with opens and closes, this definition above, yields us the same line, even if theres a shift in time. Given this definition then, the only correct way to draw a trendline is: For downtrends, to take the point of highest absolute high price on the graph, to the highest point on the current bar. If drawing such line bisects any of the bars in between the two points, then the contact end point (on the current price side) needs to be regressed (moved to the left) until such time that such is false.
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Example:
Here, point A is the highest high in the graph, and B is the high of the current price bar. The highest high in the graph is drawn to the high of the current bar, note that it crosses through a few bars, therefore violating the definition of a trend. We leave point A where it is, and regress point B back to the point such that:
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Trendline A-> B does not cross through any bars. When we do this, then the correct trendline looks like this:
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Another example.
There are bars that are being bisected between line C-D, therefore, D needs to be regressed to a low in which no bars are bisected between line C-D. The results look like this.
Given current price, and highest high on the chart (point A) and lowest low on the chart (point C), these are then the ONLY correct trendlines you can draw for this screenshot. Remember that prices are fractal, and thus you can only talk in terms of what you see on the chart, thus meaning that altering the zoomness of the chart will alter your trading, which is true and should remain true.
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I will give more examples, and go into more details about them.
This will be the chart we will be working with in our example. Let us first identify, the highest high, and lowest low on this chart. I have marked them as A and X respectively.
Let us then draw a line, from A to the high of the current bar, and a line from X to the low of the current bar. You will note that with all my charts, there are only highs and lows, no opens and closes.
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Note that the line going from A to the high of the current bar, bisects a few bars. Note also the line from X to the low of the current bar, also bisects a few bars. I have highlighted the bars which have been bisected in red boxes.
Because this violates the definition of a trend, we will leave the anchor point A, but move the other anchor point, from the high of the current bar, to the highs of previous bars, until such a point, that A to endpoint crosses no bars. I shall do this for you in successive screenshots. While A remains the same anchor point, I will move the other end point back, to highs of each bar, until such time, our condition is met.
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I will zoom in on the chart for easier viewing (zoomed in portion marked in red box)
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We will now move that line to the high of every bar, and we keep doing so until such point in time that no bars are bisected by that line.
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A-> high of 2 bars back. We still bisect bars in between. Next, I will give you the series of progression without comments.
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Here, we have finally regressed the end point such that point A, and our other end point do not bisect any bars in between them.
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I will go back to our reference chart with the A line correctly drawn, but the X line incorrectly drawn.
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I have marked the two anchor points which are used, with red arrows.
In this example, because the X line is further back in time than the A line, X would be considered the longer term trend, and A would be considered the shorter term or temporary trend. Sometimes, A is also called the pullback. That means in this chart, we have an uptrend (X line) with a downtrend pullback (A line).
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The examples I have given, should be sufficient for you to understand how to draw a trendline, quickly, and accurately. While I have no way of proving that these two lines are indeed correct to the current trend, I do know that these two lines do not violate (mathematically) what we know about trends (on the chart we are viewing), something that cannot be said for about 95% of all trendlines drawn on almost all charts I see. Without falling into an obvious Black Swan fallacy, and acknowledging that both are completely different, we can NEVER know that what we have drawn is a correct trendline, but we can know quite a lot. We know: The highest high and lowest low on any given chart, will always be a reference point, because of the definition of trends. We know: Highest high and lowest low, will vary, according to the zoomness of the chart, and every persons trendline will be altered by their chart and their timeframe and their perspective on the chart. This is due to the fractal nature of prices. We know: Any trendlines we draw for the current bar, will not violate the definition of a trend, i.e. that the trend line will not have broken previous bars. As said from a discussion with a trader who shall remain anonymous, when you draw a trendline extending to the current bar, trend virginity should not have been breached. No lines you draw should bisect any bars between your two contact points.
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The current price IS the highest price, so the trend is UP! easy!
That was
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Now let us draw a trendline for it. Using the same principle, I have marked the lowest low on the chart as L. I have drawn a trendline such that the trendline does not violate what we know about trends. I have marked the other endpoint used with a red arrow.
Please note that no bars are bisected between L and the red arrow. In this case, there is only ONE trendline on this chart, because the current price is the highest high.
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Same can be said for obvious downtrends. Current price is the lowest low, so we have an obvious downtrend.
I have marked the anchor point as H (Highest High point on the chart), and marked the other anchor point with a red arrow.
Please note that no bars are bisected between H and the red arrow. In this case, we have again, only one trendline, because the current price is the lowest low.
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Unanswered Questions
The unanswered question I anticipate arising: Question: How do you then know when a trend has been breached if no trendlines you draw, will ever bisect a bar previous to it? The definitions you give, seem to render trendlines fairly lobotomized. Answer: This I answer this in the 2nd book. In the 2nd book, I will go into more details about trend biases and previous trend breaches. I will also cover things like trend fans.
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Question: By your definition, doesnt this mean we have to redraw a new trendline with every new bar? Answer: Yes and no. This partially answers one of the previously unanswered questions when you ask this question, if you havent figured that out.. Yes, you need to reevaluate the current trend, with every new bar. Because we regress the bars when we draw the trendlines, it might be possible that we need not redraw the line at all, that our old line still holds true. BUT, assuming the trend has changed, if you never erase the previous trendlines you drew for previous bars, you will then know when the current price breaches a previously drawn trendline. In the 2nd book, I will give a better definition for it how to deal with and draw breaches, and how to deal with trend breaks. Question: I feel suckered. By not answering the question above, you are trying to get me to buy your second book arent you? Answer: Did you learn something from this book? If so, how can you be suckered? The reason I have broken this book into two parts, is because of the anticipated length of time it will take me to generate the 2nd half. If this book was postponed to wait for the 2nd half to be finished before it is released, the release date would be pushed back probably by 6 months to a year, even accounting for Hofstadter's law. So I made the decision to break the book up, so the first parts I have finished can be released early to help as many people as possible. UPDATE: I have finished the 2nd book called Trendfans and Trendline Breaks. It is available for purchase at http://www.priceactionforex.com
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Conclusion
What started out as, me; being sick and tired of typing the same thing and answer emails, has resulted in a book that explains the basics of trends. However, not reading the 2nd book does not preclude you from thinking for yourself!! In fact, I HIGHLY recommend you question everything I have written, and think for yourself. Chances are, with some effort, you will be able to think of most of the contents from the 2nd book for yourself. I encourage you to think more. Until we meet again, may all your trades be fruitful and profitable ones. Reading, after a certain age, diverts the mind too much from its creative pursuits. Any man who reads too much and uses his own brain too little falls into lazy habits of thinking. -Albert Einstein Please frequent my website http://www.priceactionforex.com, the 2nd volume of Trends and Trendlines, called Trendfans and Trendline Breaks has been released. Also, come to the website as I often offer free ebooks! Thank you for your time.
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