Professional Documents
Culture Documents
Tina Logan Guide To Trendlines PDF
Tina Logan Guide To Trendlines PDF
Tina Logan Guide To Trendlines PDF
Tina Logan’s
Guide to Using Trendlines
Disclaimer and Waiver of Claims: The discussion that follows is purely educational in
nature. It was designed and intended to assist readers in increasing their knowledge of
chart analysis. Any reference to specific stocks is for educational and illustrative purposes
only and should not be construed as advice to buy or sell those stocks. Tina Logan is not a
stockbroker, broker dealer or investment advisor and makes no recommendation on specific
stock transactions. Trading in the stock market involves a degree of risk that may result in
financial losses.
Charting is partially skill and partially an art; some of the content of these materials is
subjective in nature. There is no guarantee these methods will suit your trading style and
personality, but rather are intended to serve as a model.
All rights reserved: The content of this e-book is the property of Tina Logan. This copy is for
your personal use only. The information shall not be copied, forwarded or distributed; or
used by any other person or organization in any publication or training medium; without
written permission from the author.
The lack of attention or understanding in this area may be due to the fact that many
technical analysis publications do not give a tremendous amount of detailed instruction
or illustration on drawing trendlines. This e-book was developed with as much detail as
possible with the goal of answering all of your questions and helping you to put this
important technical tool to work.
When you first begin drawing trendlines, it may feel awkward. But with the guidelines
provided here, and plenty of practice, you’ll make steady improvement. Eventually it will
become second nature for you -- you’ll be able to just glance at a chart and determine
the strongest lines. Even so, I still recommend drawing the physical lines on the charts.
A trendline is one of the most basic charting tools available to traders. Trendlines can
be used to determine the following:
2. The trend direction and also when a trend has changed direction (see BRCM
example on the following page).
This e-book includes detailed discussion of each of these important uses for trendlines
and instruction on how to properly draw the lines. For illustration purposes only, the
examples and images used throughout this e-book are taken from Telechart. Most
trading platforms offer similar processes and tools for drawing trendlines.
There are different methods and schools of thought on drawing trendlines. The classic
method of drawing trendlines involves touching the lines to pivot points. That is the
method referenced in this instruction. If you are unfamiliar with pivot points (peaks and
bottoms), they are covered later in this e-book.
In his book Trader Vic - Methods of a Wall Street Master, Victor Sperandeo
discusses an interesting application of trendlines for determining trend
change. His method is called the 1-2-3 change of trend. I recommend
reading his book once you have a good foundation of technical analysis under
your belt; it is well worth the time.
Why should you want to learn how to use trendlines? Because it will dramatically
improve your understanding of support and resistance; as well as improving your
pattern and trend recognition skills. Something as simple as obeying a strong trendline,
selling when price declines below strong support, could have saved Americans billions,
yes billions, of dollars when the Nasdaq topped out in 2000. In order for a stock to fall
from $100 to $10, it certainly had to have broken at least one significant trendline. Rest
assured that the trendline was broken much closer to the $100 price than the $10 price.
The chart below of Broadcomm Corp (BRCM) shows price action from late 1998 to late
2002 on the weekly time frame. Having employed even a simplistic exit strategy, such
as selling when the stock closed below the rising trendline on the weekly chart, would
have helped traders and investors avoid holding the stock into a downtrend. The stock
lost over 94% of its value from March 2000 to October 2002.
Having used protective sell stops also would have kept traders from holding into that
decline. Optimistic traders had grown so accustomed to stocks going up that most were
caught by surprise when the Nasdaq bubble burst. Many were not using prudent risk
and money management practices and gave back a significant amount of their profits
before finally exiting. Some are still holding stocks that fell from triple to single digits.
Telechart
Notes:
Draw a Trendline:
In Telechart, trendlines can be drawn in the chart window but not in the two indicator
windows. To draw a trendline in the chart window I use the hot key method:
Erase a Trendline:
The quickest way to erase a trendline in Telechart is to use the hot key method: Ctrl +
D. Hold down the control key and press the letter “D” on the keyboard. This method
erases the most recently drawn trendline. If you have drawn several trendlines on a
chart and wish to delete them all, keep the control key depressed and repeatedly press
the letter “D.” Each line will be erased, in the order they were drawn from newest first to
oldest last, until they have all been removed.
3. Select delete.
Move a Trendline:
The parallel line is hidden behind the first trendline. It can be revealed by clicking the
middle circle on the first trendline and dragging the parallel line away from the first line
to the desired location. As long as you do not make any adjustments using the circles
on either end of the line, the parallel line will remain perfectly straight and the same
length and angle as the first line.
Trendline Extension:
Trendline
If you draw a lot of trendlines on some
charts, the extensions can be Extension
bothersome because they clutter the
chart. If you prefer to keep the
extension feature turned off, you can Telechart
quickly toggle it on as needed.
There is a quick way to toggle the trendline extension on and off using the hot key
method: Ctrl + T. Hold down the control key and repeatedly press the letter “T” to toggle
among the following three options:
• Trendline
• Trendline with Extension
• No Trendline
Trendline Color:
You may have the option of changing the trendline color to your preference. In
Telechart you can select from several colors. The color you select should be easy to
see against the background. Since I prefer a white background, I use black or dark blue
trendlines. You may also select the trendline extension color.
1. Click on Tools.
2. Select Chart Display Options.
3. Click the Markers/Trendlines tab.
4. Click the down arrow to the right of Show
Trendlines and select the desired color.
5. Click the down arrow to the right of w/extensions
and select the desired color for the extensions.
6. Click OK to apply the changes.
• Trendline
• Linear Regression Trendline
• Horizontal Trendline
• Vertical Trendline
• Text
• Fibonacci Arcs Drawing Toolbar
• Fibonacci Fan
• Fibonacci Retracements
You can experiment with these tools if you use Telechart. You’ll also find instruction on
their use in the Help menu. For the first tool (Trendline), it is faster to use the hot key.
Just press the letter “D” on the keyboard. Of these additional tools, the one I use quite
often is the horizontal trendline which is discussed below.
Horizontal Trendline:
The horizontal line is drawn like a trendline;
however, until the mouse is released the line can
be moved up and down vertically, the length
changed, and it also remains perfectly straight.
A bottom is also a pivot. It consists of three bars with the middle bar’s low being the
lowest.
Classic trendlines touch pivot points. In order to be deemed a touch on the line there
must be a pivot present. These lines are sometimes referred to as external trendlines.
A touch on the line is a “test” of support or resistance. As a general rule, the trendline
should touch as close as possible to the actual turning point of the pivot. However,
there will be times when the trendline will breach one or more bars, which will be
discussed later in this e-book.
A trendline is drawn across pivot points connecting one pivot to another. There must be
at least two pivot points (touches) to draw a valid trendline. Ideally there are three or
more touches on the line. Some traders do not consider a trendline to be valid unless it
has at least three touches.
Peak Bottom
Touch High of Pivot Day Touch Low of Pivot Day
Often there is more than one valid trendline that can be drawn. The strongest trendline
is the one that touches the most pivot points. The more touches on the line, the
stronger the trendline is for support and/or resistance and the more significant the signal
when the line is broken. Traders will pay attention when a very strong trendline (many
touches), or a long trendline, has been broken.
A common mistake that I see is when traders attempt to draw a trendline across highs
or lows of price bars neglecting to touch the line to two or more pivot points. This
results in an invalid trendline.
Notes:
As long as the pivot point is fairly close to the trendline, it can be counted as a touch on
the line. As a general rule, if the pivot is within about one third of a horizontal gridline
from the trendline (the gridlines shown below are logarithmic scaling), I consider it to be
a test of the line. If it is not very close to the line, do not count it as a touch.
Not a Touch
Touch
There are usually several valid trendlines on any given chart. And there will be many,
many two-touch trendlines. In other words, there are many combinations where you
can touch a trendline to two peaks or two bottoms.
If you were to attempt to draw all valid trendlines on most any chart, you’d probably end
up with a cluttered mess. In the example below of Bearingpoint Inc (BE), about a dozen
valid lines are shown. Most of them are two-touch lines, and most of them are not
relevant in regards to the primary purpose for drawing trendlines.
Telechart
The two parallel horizontal lines (dashed) on the Bearingpoint chart are the primary
trendlines. This stock is trapped in a trading range. Most of the other lines are more
confusing than helpful.
To avoid drawing a lot of two-touch trendlines that may keep you from focusing on
stronger lines, draw your primary trendlines touching prominent pivot points rather than
minor points. Touch two, and preferably three or more, pivots that stand out enough on
the chart that they’ll be noticed by a large number of traders. If traders can easily see
support or resistance levels, they are more likely to take action at those turning points.
The less prominent pivots won’t usually draw as much attention; however, price may still
stall at or pull back from those points.
Line Graphs:
When displayed in line graph form, the price line plotted on the chart connects the
closes from bar to bar. Classic trendlines are drawn across pivot points, not across the
closes. Periodically I will shift to a line graph to remove some of the noise on the chart.
However, I do not typically draw trendlines on line graphs, although some traders do.
Notes:
Price may pierce a trendline leaving a shadow on the other side of it. This indicates that
price temporarily pushed beyond the trendline intraday, but was trading back inside the
line by the close of market. The trendline need not be redrawn to touch the actual pivot
point of that shadow unless it will result in a stronger trendline than the line that it
pierced.
Time Frames:
In Telechart, the trendlines drawn on one time frame can be seen on the charts of the
higher and lower time frames. For instance, a trendline drawn on the daily chart across
a support or resistance level will be present on all intraday time frames. This is helpful
because you can easily see the point during the trading day where price broke a
significant resistance (or support) level that traders were watching on the higher time
frame.
In the example below of UT Starcom Inc (UTSI), the stock was trapped in a narrow base
on the daily chart. On intraday time frames, that narrow base looked like a much wider
horizontal channel. When the stock broke out from the base on October 5, 2006, it was
easy to see where, and when, it broke through resistance on the intraday time frames
as well because the trendlines from the daily time frame were present on the intraday
charts.
Breakout
Breakout
Telechart Telechart
UTSI - October 5, 2006 - Daily Chart UTSI - October 5, 2006 – 15-Min Chart
Notes:
Price action is not always clean. In fact, it is often messy and difficult to decipher.
There will be many times when you’ll need to draw a trendline through one or more
price bars in order to identify the area of price congestion.
The goal is to draw a trendline that shows support or resistance along the majority of
the congestion area. In order to do that, you may have to draw the line through one or
more bars.
If it is necessary to draw a
trendline through a pivot, it still
counts as a touch on the Trendline drawn through a pivot.
trendline.
Unless attempting to identify a trading range, which can often have erratic price moves,
I do not suggest drawing a trendline through more than one pivot. If you have to draw
the line through two or more pivots, there is probably a strong line outside of those
pivots that may offer support or resistance for the stock.
Because trendlines identify areas of support and resistance, it is common for the line to
be touched on both sides. Support and resistance reverse roles -- what was once
support becomes resistance and vice versa.
If looking back into the past to determine strong support or resistance levels that the
stock may encounter again, do not be concerned about drawing a trendline through
price bars. In these situations, you are not trying to determine the trend direction or if a
chart pattern is forming, you are simply looking for historical strong support or
resistance levels that may impact your trade. Therefore, it does not matter how many
shadows, bodies or pivots are breached.
Telechart
COMPRESSION (ZOOM):
Horizontal compression refers to the time axis. It determines how much price
data is displayed on the chart. In Telechart, horizontal compression is
referred to as the “zoom.” The magnifying glass icons on the main tool bar Zoom
are used to adjust the zoom. The zoom you use may dramatically impact the
trendlines you draw. I use the following guidelines:
Zoom 5:
This is my primary zoom. It is the
one that I use most often when
drawing trendlines and when
scanning through lists of stocks
looking for tradable set-ups. This Primary Focus
view displays about five months of
data on a daily chart.
There are good reasons behind using this as the primary zoom. First, most
intermediate-term trends last from about one month to about three months. Second,
most large chart patterns range from three weeks to about two to three months. If you
were to analyze charts and draw trendlines looking at less data, you may not identify
tradable patterns or see important trends developing or reversing.
In the Lifecell Corp (LIFC) example below, viewing the chart on zoom 5 you can see
that the stock is consolidating. The trendlines identify a symmetrical triangle. On zoom
7 the duration of the trend prior to the consolidation was not evident.
Telechart Telechart
Zoom 7 Zoom 5
Property of Tina Logan – Trader’s Roadmap www.tradersroadmap.com (Rev. Nov 2006)
All Rights Reserved ©. May not be duplicated or distributed without permission
TINA LOGAN’S GUIDE TO USING TRENDLINES - 18
In the Caremark RX Inc (CMX) example below, viewing the chart on zoom 5 you can
see that the stock has been in an uptrend for several months and has just broken a
strong rising trendline. The duration of the trend is not evident looking at zoom 7.
Telechart Telechart
Zoom 7 Zoom 5
Zoom 6 or 7:
These views display about two to three months of data on a daily chart. These zooms
are useful for the following:
Notes:
Zoom 3 or 4:
These views display up to a year or more of data on a daily chart. These zooms
provide a bigger picture of price action. They can be used to look for the longer-term
trend as well as major ceilings (resistance) and floors (support). Often you’ll see a
significant ceiling or floor that wasn’t visible on zoom 5.
Resistance
Telechart Telechart
Zoom 5 Zoom 3
Also you’ll often discover that a trendline you’ve drawn can be extended further back
where price traded at, or near, that area in the past. In other words, the line is stronger
than it had appeared when looking at fewer months of data. The chart below of Foster
Wheeler (FWLT) is a good example. On zoom 5 you can see that there is a zone of
resistance above the current price. When you compress the chart to zoom 3, it is clear
that the stock had used that price level several times as support before breaking down
through it. Remember, support and resistance tend to reverse roles.
Resistance
Support
Telechart Telechart
Zoom 5 Zoom 3
Trader Tip: Another method of viewing the bigger picture is to stay on zoom
5 and shift to the time frame one higher. In Telechart press 5 to shift from
the daily to the weekly time frame. Press 1 to return to the daily time frame.
Or set up one of the twelve chart templates that correspond with the “F”
(function) keys at the top of your keyboard for the weekly time frame. You
can quickly shift to that template at any time to view the weekly chart.
Vertical Compression:
In your charting program, you may also be able to compress the chart vertically. This is
sometimes necessary when drawing trendlines. The price bars may be too close to the
top or bottom of the chart window to draw the trendline to the highest or lowest pivot.
Vertical Compression
the window. down from top
of chart.
Breakout
Resistance
Support
Break Down
Support and Resistance lines can go back weeks, months and even years in some
cases. To draw very long-term trendlines I suggest using a weekly or monthly chart.
Channel Lines:
Regardless of the trend direction, stocks often swing up and down between a support
and a resistance line. Parallel trendlines can be drawn on each side to trap the price
action. These trendlines are often referred to as channel lines.
• Up
• Down
• Sideways (no trend)
A rising trendline is not static. If price continues higher, the line can usually be raised a
little bit each day. And every time a new, higher bottom forms, determine if the trendline
needs to be adjusted. A new higher pivot may cause the trendline angle to change.
(Angle is discussed later in this e-book.) The more times the trendline touches new
pivot points, the stronger the line becomes.
Price may pierce the rising support trendline leaving a shadow below the line; however,
a close below the primary trendline alerts of a possible change in trend.
A declining trendline is not static. If price continues lower, the line can usually be
lowered a little bit each day. Every time a new, lower peak forms, determine if the
trendline needs to be adjusted. A new lower pivot may cause the trendline angle to
change. The more times the trendline touches new pivot points, the stronger the line
becomes.
Price may pierce the declining resistance trendline leaving a shadow above the line;
however, a close above the primary trendline alerts of a possible change in trend.
When price is moving sideways, you may be able to trap the price movement in one of
the following ways:
If price is moving sideways, making prominent peaks near the same price level on the
upside and forming prominent bottoms near the same price level on the downside, the
stock is in a trading range.
• Top Trendline - A horizontal line is drawn across prominent peaks (pivots). This
resistance line is the upper boundary, or ceiling, of the trading range.
Angled Trendlines:
If price is moving sideways and is making uneven swings, you may be able to trap the
consolidation between two converging or diverging trendlines.
Converging Lines - A triangle forms when price moves sideways for several weeks with
each swing becoming shallower. In a triangle, price “coils” and tightens as it moves
toward an apex. There are three types of triangles:
• Ascending Triangle – A bullish pattern with a flat top and a rising bottom trendline.
Regardless of whether this pattern forms in an up or down trend, it has a bullish
bias. However, traders often “fade” the failed pattern (go Short if it breaks down
instead of breaking out).
• Descending Triangle – A bearish pattern with a flat bottom and a declining top
trendline. Regardless of whether this pattern forms in an up or down trend, it has a
bearish bias. However, traders often fade the failed pattern.
• Symmetrical Triangle – A neutral pattern with two converging trendlines (the top line
slopes down and the bottom line slopes up). The bias is for the stock to resume the
prior trend direction that was under way before the triangle formed. However, it can
be traded Long if it breaks to the upside or Short if it breaks to the downside.
Diverging Lines – Price may move sideways for a period of time making wider swings
each time. In these cases, the trendlines will be diverging instead of converging (the
top line slopes up and the bottom line slopes down).
• Broadening Pattern - A lesser known member of the triangle family is the broadening
pattern. Price moves sideways but swings outward from an apex instead of coiling
into the apex. This pattern is fairly rare.
Telechart Telechart
Ascending Triangle Descending Triangle
Telechart Telechart
Symmetrical Triangle Broadening Pattern
Ideal Angle:
Too Steep:
Too Gradual:
When a stock is in an uptrend, there are often two or more support trendlines of varying
slope that can be drawn. Vice versa in a downtrend. If you are watching for a break of
the trendline as a warning that the trend may be changing, which of the lines should you
focus on? That may depend on the magnitude of the trend under way and also your
style of trading.
• Primary Trend – A long-term trend that lasts from several months to a year or more.
• Minor Trend – A short-term trend that lasts from a few days to a few weeks.
When a stock remains in an uptrend for several months, it is common for several short-
term rising trendlines to be broken during times when the bigger trend experiences deep
pullbacks or corrections. If you are drawing tight lines on the daily chart, like the short-
term trendlines shown in the example of the iShares S&P Index Fund (IVV) below, you
should anticipate that they will be broken fairly frequently.
Often a stronger
trendline lies below the
short-term lines that is
representative of the Short-Term Trendlines
intermediate-term trend.
Long-Term Trendlines:
I focus on the few months closest to the right edge of a daily chart to find tradable set-
ups and do much of my analysis. However, it is also important to look beyond the most
recent few months to see the longer-term trend. Be aware of major ceilings and floors
in the past. They often stop a stock’s move in its tracks, at least temporarily. A break of
these major support and resistance levels is a significant event.
For very long-term trends (i.e. a year or more), consider drawing trendlines on the
weekly chart. When a strong trendline on a weekly chart is broken that is a very
significant event. From 2004-2006 many cement stocks were in a bull market due to
demand for the product and limited supply. In a strong uptrend like that, a core position
can be held, sometimes for weeks at a time, and swing trades can be taken around the
core position. This is a method that I refer to as Lock and Reload. It is outlined in my
advanced strategies course.
On the chart below of Cemex (CX), several short- and intermediate-term trendlines
were broken on the daily chart over a period of about a year and a half. However, the
long-term trendline on the weekly chart remained intact for most of that period. When
the weekly trendline was finally broken in May 2006, the stock declined for several
weeks.
Cemex (CX)
Daily Chart
Several intermediate-
term trendlines were
broken.
Telechart
Cemex (CX)
Weekly Chart
Telechart
Trendlines are not static, they should be monitored. There will be many times when
new price action forces you to adjust a trendline or draw a new trendline.
When I have a Long position in a stock and the trendline slope shifts notably higher, I
typically decrease my position size (i.e. sell a third to half of the shares) to reduce
exposure to a sharp decline. I may also shift to managing the remainder of the position
on the hourly time frame. On that lower time frame, you will typically see an earlier
warning if the stock begins to break down than by just monitoring the daily chart.
Detailed discussion for using the hourly time frame is included in my advanced
strategies course.
~Abraham Lincoln
I also maintain trendlines on the following market averages. Their symbols in Telechart
are indicated in parenthesis:
I usually have trendlines drawn on many other index charts that I review regularly. For
example, on sector indexes such as the Semiconductor Index (SOX--X) and the
Housing Index (HGX--X).
Traders who have little or no experience drawing trendlines may struggle a bit at first.
Below are some tips that may be helpful in the early stages. Eventually, drawing
accurate trendlines should become easy.
Two Step Approach: Try first drawing a trendline touching the most extreme points
(the most prominent peaks or bottoms). Don’t clip off even a shadow. Then look at that
line and evaluate it. Is it the strongest line that can be drawn, or could it be adjusted to
touch more pivot points and leave fewer voids on the chart (areas of white space
between the touches)? Tighten the line to the best fit, even if it means clipping one or
more shadows, bars, or even a pivot in some cases.
1
2
Most technical analysis books that include discussion of trendlines suggest drawing the
line from left to right. That is also the method that I prefer; it feels awkward to me to
draw trendlines from right to left. However, if you are struggling with drawing trendlines,
you can try starting from the right edge of the chart and drawing from right to left.
You may find it difficult to draw trendlines when there are a lot of indicators in the chart
window. The plot lines of moving averages, Bollinger Bands or a linear regression often
make the chart look very “busy.” They lay over the peaks and bottoms making it difficult
to draw an accurate line. For this reason, one of my twelve chart templates in Telechart
is set aside for drawing trendlines.
I use the #12 template for this purpose because it is easy for me to remember that it is
the last one of the “F” (function) keys at the top of the keyboard. This template is
completely clear of any indicators so there is an unobstructed view of the price action.
Telechart Telechart
IN CONCLUSION
I sincerely hope that this e-book has answered all the questions you have about
drawing classic trendlines, as well as emphasizing their role and importance as a
charting tool. In order to become proficient with this tool, you must put it to work. With
practice, your trendline skills will steadily improve and you’re ability to analyze a chart
will be greatly enhanced.
Trendlines are just one facet of becoming a skilled chartist. As of this writing, I am in
the final stages of development of a very comprehensive and detailed course that
encompasses the other areas of chart analysis. If you are interested in further
instruction on charting or other trading-related topics or strategies, please e-mail me
directly at tina@tradersroadmap.com or visit my website at www.tradersroadmap.com.
Sincerely,
Tina Logan
Trader’s Roadmap