Stocks & Commodities V.

27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort

Tantalizing!

Trendline Tips And Tricks

How do you capture those medium- to longer-term moves in and out quickly at turning points is not that difficult. But
JOSE CRUZ

when trying to enter and exit trades quickly? how do you stay in a trade to capture those medium- to

D
longer-term moves while acting quickly to enter or exit at
by Sylvain Vervoort the same time? Let me show you some tips and tricks using
trendlines that can help you achieve this.
aydreaming about trading? Get in a trade early It is important that you always use the same number of
and close to the low point; stay in as long as horizontal and vertical pixels for your chart with preferably
needed and get out fast at the top! The problem, the same number of price bars. That way, you will develop
of course, seems to be the middle part. Getting the experience of looking at the slope of a trendline with
Copyright © Technical Analysis Inc. www.Traders.com
Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort
charting

50

respect to the time period you want

to trade in.
In Figure 1 you can see how the 45
slope of the trendline can go from
very sharp for the short term to Short-term
moderate for the medium term and inclination 40
rather flat for the long term within Long-term
the same long-term time period. inclination
The longer the time period to look
35
at, the more reaction in price must Medium-term
be allowed, and hence the flatter the inclination
trendline.

METASTOCK
30
Tips and tricks Jul Aug Sep Oct Nov Dec 2007 Mar Apr May Jun Jul Aug Sep Oct Nov Dec
When there is a nice move up from Figure 1: The character of trendlines. Here you see short-, medium-, and long-term trendlines. The short-
bottom to top, you may not need term trendline has a steep slope, the medium-term trendline has a moderate slope, and the long-term trendline has
any special tricks, but there are a less steep slope.
still some useful tips that we can
discuss. In Figure 2, the up move began
after breaking a short-term red downtrend 35
line at the beginning of July. The thick
34
blue medium-term uptrend line was
drawn after the turning point around mid- 33
August. A parallel line drawn through the 32
top of mid-July forms an uptrend channel 31
and, looking ahead, we see price touching
the lower and upper part of this channel 30
several times. 29
Every bounce at the lower part of the 28
channel is a support level (horizontal red
lines) for the uptrend. After a double-top 27
pattern (thick green line), the price falls 26
through the medium-term uptrend line and 25
breaks the medium-term uptrend. There is
a confirmation when price falls through 24
the last support line. 23
There are a few more interesting things 22
here. Note how every short-term green
uptrend line has practically the same 21
inclination. This happens frequently. You 20
can apply this to determine where the price
will reach the upper side of the channel July August September November
before reversing. This way, you can Figure 2: a straightforward medium-term upmove. Here, the up move was started after breaking
estimate the short-term future price and a short-term red downtrend line at the beginning of July. The thick blue medium-term uptrend line was drawn
time period. This is good for swing traders. after the turning point around mid-August.
Another aspect worth considering for
estimating the medium-term uptrend right from the beginning Accelerating and decelerating trends
is the inclination of the new uptrend signaled by the low If the up move is not a straightforward process as in Figure 2,
values of the bars at the beginning of the new uptrend (see price will accelerate or decelerate. Price acceleration is usually
Figure 2 for a detail).
You can, of course, use price bouncing back to the
medium-term trendline to enter a trade or extend your
Get in early and close to the low point.
position. However, be prepared to close the position quickly Stay in as long as needed and get out
when price turns down without making a new top. Make sure fast at the top! The problem, of course,
you close a position when the medium-term uptrend line is seems to be the middle part.
broken or when the last support line is broken.
Copyright © Technical Analysis Inc. www.Traders.com
Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort
charting

a three-step process. The trend is broken after the

third step, which is when the trend shows the
highest acceleration. Many times, you will see
that these changes in acceleration are announced
by a chart pattern.
In Figure 3 you see a trendline with a relatively
35 flat up move between the buying point (bottom left)
34 where the medium-term downtrend line is broken
33
32 to the upside, and the turning point at (1).
31 At (2) you switch to a higher gear. Keep an eye
30 on the previous support (red) line. If this support
29
28
is not broken, it is very likely that the trend has
27 accelerated. Note how the start of the acceleration
26 is announced by a triangle continuation pattern.
25
24
A similar scenario takes place at point (3), where
23 the trend switches into its highest gear.
3 22 The uptrend is finally broken when the closing
21
20
price falls through the uptrend line or the last
19 support line. Here, the end of the uptrend was
2
18 announced by a failing new high and a double-
17 top price reversal pattern.
16
1 15 A decelerating price up move is also quite
14 common. It is more difficult to handle because
Feb Mar Apr May Jun July Aug Sep Oct Nov Dec trendlines are broken while price keeps moving
FIGURE 3: AN ACCELERATING UPTREND. Price acceleration is usually a three-step process. The trend
up. A longer-term uptrend starting with a sharp
is broken after the third step, which is when the trend shows the highest acceleration. up move will slow down. Short-term reactions
will hold up the main trend.
In Figure 4, we entered the trade after the
medium-term downtrend line was broken and
the bullish engulfing pattern in the candle chart
35 was confirmed. The up move started with a sharp
inclination.
After about three weeks, this uptrend line was
30 broken. If you are not a swing trader and are
waiting for a relatively medium- to long-term
up move, you should wait and make use of the
25 first available support line as a selling level in
case price continues to move down. In this case
we are using the support of the window (gap)
20 in the previous up move.
Just after a couple of days, the uptrend resumes.
This enables us to draw the second, less-inclining
15 uptrend line. Note that this trendline is broken
downward after a couple of weeks. Again, you
use the last support to stay in the trade. About
1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 a week later, the price moves up again. You can
October November December 2002 now draw a third, even less-inclining uptrend
line. As you can see, this line holds for a longer
FIGURE 4: A DECELERATING UPTREND. A decelerating uptrend is more difficult to handle because
trendlines are broken while price keeps moving up. period of time until it is broken, confirming
a dark cloud cover pattern in the candlestick
chart. It should be clear that even if this is not
the final top, it is a good time to take the 100%
profit now.

Copyright © Technical Analysis Inc. www.Traders.com

Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort
charting

Sharp turning points

A sharp V-type turning point makes
things more difficult. It becomes
impossible to draw a medium-term
trendline from the lowest point. In Figure
5, during the second half of March, there
46.0 is a big hammer candle afer a big sharp
45.5
45.0 down move. The hammer itself or the
44.5 confirmation after the hammer is a good
44.0
43.5 buying point.
43.0 It is not possible to estimate the medium-
42.5
42.0 term inclination, even using the May price
41.5
41.0
reactions, because the inclination remains
40.5 too steep and trendlines are broken several
40.0
39.5 times through these reaction points while
39.0 price continues moving up.
38.5 In these circumstances, it becomes nec-
38.0
37.5 essary to look for ways to draw a flatter
37.0
36.5 trendline. In this case, it looks like the only
36.0 possibility is to use previous or following
35.5
35.0 candles at the low turning point and ignore
34.5 the V-pattern. As you can see, the lows of
34.0
5 12 19 26 2 9 16 23 30 7 14 21 29 4 11 18 25 2 9 candles before the hammer and the low of
March April May June July a following candle after the hammer were
used to start an acceptable inclination for
FIGURE 5: TRENDLINES AND V-SHAPED TURNING POINTS. It is impossible to draw a medium-term trendline
from the lowest point. In such cases you need to look for ways to draw a flatter trendline. Here it looks like the
a medium-term uptrend.
only possibility is to use previous or following candles at the low turning point. By the end of April, it became clear that
this was the correct trend. Eventually, you
15.5 can move above the original line. See the
15.0 dotted blue line with the same slope as the
original line. This more closely follows
14.5 the actual price lows. We can also draw a
14.0 parallel line to create a price channel.
15.513.5 Moving forward, there seem to be higher
15.013.0 lows and higher highs within the price
14.5 channel until the end of June, when price
12.5 turns without making a new high (actually
14.0
12.0 a double-top reversal pattern). At this top
13.5
11.5 you also see a bearish engulfing pattern in
5 13.0 the candle chart. This is more than enough
11.0
12.5 reason to close the position at this point.
4 10.5 The latest you should close the position is
12.0
10.0 when price drops through the medium-term
11.5 uptrend line or through the last support
5 3 9.5
11.0 level (red line).
1 2 9.0
10.5
4
10.0
Inverse trendlines
February March April May June When it comes to estimating the slope
3 9.5 of a future medium-term uptrend line,
FIGURE 6: USING THE INVERSE TRENDLINE. One of possibilities is to use a parallel line with an inverse
1trendline. If 2you draw this parallel line through a low point of the up move, you not only get the medium-term
9.0 there are a few tricks you can apply
uptrend line but also a medium-term price channel. successfully. One of them is to use a
February March April May June parallel line with an inverse trendline. If
you draw this parallel line through a low
point of the up move, you not only get
the medium-term uptrend line but also a
medium-term price channel.
Copyright © Technical Analysis Inc. www.Traders.com
Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort
48.5 charting
48.0
47.5
47.0
46.5 and then project a parallel line through
46.0
45.5 the low at (3), you are prepared for future
45.0 price movements. And as you can see,
44.5 that was the correct medium-term trend.
44.0
43.5
43.0
Andrews pitchfork
42.5 Another trick to estimate the future price
42.0 trend is making use of the Andrews
3 41.5 pitchfork. In Figure 7, let’s say you open
41.0 a position when price rises above the
40.5 medium-term downtrend line.
40.0
39.5 After the first down reaction, you can
2 39.0 draw an uptrend line between (1) and
1 38.5 (2). The slope of this line looks flat and
is probably not what you can expect for a
November December 2004 February March medium-term uptrend. Here you have a nice
FIGURE 7: ESTIMATING FUTURE PRICE CHANNEL WITH ANDREWS’ PITCHFORK. Here you have an opportunity to draw a pitchfork between the
opportunity to draw a pitchfork between points 1, 2, and 3. You can continue to draw the accelerating uptrend points (1), (2), and (3). Future price develop-
lines and exit the trade when the steepest uptrend is broken. ment proved that this was the right thing to
do. You can, of course, continue to draw the
accelerating uptrend lines (as shown), and
exit the trade when the steepest uptrend is
17.0
broken by the closing price.
16.5
If you extend the second uptrend line and
16.0
parallel line, it will give you an uptrend
15.5 price channel that fits almost perfectly with
15.0 the pitchfork. So the latest you would get
14.5 out of the trade is when price is falling out
14.0 of this channel (not shown).
13.5 The last trick I want to show you is the
13.0 use of a 30-day Ema. This average gives
12.5 you some kind of an active trendline. In
12.0 cases where all other methods fail, you
11.5 can use this average to estimate the slope
11.0 of the future up move.
10.5
10.0 Trendlines using
9.5 moving averages
March April May June July At the end of February, when the closing
price crosses the medium-term downtrend
FIGURE 8: TRENDLINE BASED ON THE BEGINNING OF AN EXPONENTIAL MOVING AVERAGE. The EMA
starts rising after a downward followed by a flat move. From the up turning point you only need about seven days line, a position is opened (Figure 8).
of data to draw an uptrend that coincides with the up move of the average (brown line between the two blue There is a slight upward move until the
dots). If you extend this line to the future, you can see this slope closely matches the price movement. beginning of April. So the uptrend line
that you can draw is probably too flat
In Figure 6 you would open a position when the closing price for a medium-term up move. The other techniques discussed
breaks above the medium-term downtrend line. You can use a previously do not provide a solution that will result in a better
stop just below the low of (2). You can draw an uptrend line estimation. Assume you are at the point indicated by the blue
through the lows of (1) and (2). In less than four weeks, this rectangle (there is a detail view at the right lower side of
uptrend line is already broken. Since the price is close to the stop the chart). The 30-day exponential moving average (Ema)
level, I would just wait to see what happens next, because there is (green) is plotted on this chart. After a downward followed
still the likelihood of a medium- to longer-term uptrend. by a flat move, it is now rising.
A low at (3) is formed and price moves up again. The Starting from the up turning point, you only need about
new uptrend line between bottoms (1) and (3) seems too seven days of data to draw an uptrend line that coincides
flat for the medium-term uptrend. So what could be a more with the up move of the average (brown line between the two
reasonable gradient? blue dots). If you extend this line to the future, you can see
If you draw the reverse trendline through tops (4) and (5) this slope for the medium-term uptrend closely following the
Copyright © Technical Analysis Inc. www.Traders.com
 Stocks & Commodities V. 27:8 (10-18): Trendline Tips And Tricks by Sylvain Vervoort

5 charting
33.5
33.0
32.5
32.0 that is a morning doji star bottom reversal
pattern (2) in the candle chart. It’s time to
1 31.5
open a position.
31.0
You could keep a stop at the low of the
30.5 window (gap), but since the low of the doji
7 30.0 turning point is very close at (3), I decided
6 29.5 to keep it at that point. Price moved up
29.0 to (5) and reacted back to (4), but is now
4 28.5 turning up again with an island reversal
pattern at (7).
28.0
You can now estimate the future price up
2 27.5 move. You can draw the brown uptrend line
3 27.0 between the low points (3) and (4). You can
10 18 24 3 10 17 24 31 7 14 draw the gray reverse trendline through (1)
February March April and (5) and you can draw the lighter blue
trendline (for the fast up move) that coincides
FIGURE 9: CONFIRMING THE MEDIUM-TERM UPTREND. Here you see how you can combine trendlines
with candlestick chart patterns. with the first seven days of the movement
up to the 30-day Ema. And finally, you can
draw a red pitchfork between the points (4)
and (5) and a previous low point.
39 If you were to use the first lowest point (3),
38 it would give you a sharp unrealistic steep
pitchfork. On the other hand, using the high
37
point before that would give you a very flat
36 pitchfork. So the most acceptable point is the
35 low point before that. This is confirmed by
5 34
different prices coming close and touching
the median line of that pitchfork.
33 In Figure 10, you can see that all the
1 32 techniques I discussed here can be applied
31 favorably and predict the medium-term
uptrend slope quite well. I hope these tips
30 and tricks will be useful in estimating future
6 29 price channels using trendlines.
4
28
Sylvain Vervoort, living in the Flemish
27
part of Belgium, is a retired electronics
February March April May June engineer. His new book Capturing Profit
FIGURE 10: RESULT OF UPTREND ESTIMATION USING DIFFERENT TECHNIQUES. Here you see how With Technical Analysis: Hands-On Rules
some of the different techniques such as trendlines, Andrews pitchfork, exponential moving averages, and For Exploiting Candlestick, Indicator,
inverse trendlines were applied to predict the medium-term uptrend.
And Money Management Techniques,
published by Marketplace Books, is about
price movement. applying technical analysis and introducing a trading method
Lines parallel to this trendline make a nice future price called Lockit, featuring his own techniques and proprietary
channel. The position is closed when the closing price drops out indicators. Vervoort may be reached via his website, http://
of this channel. If the start of the exponential average uptrend is stocata.org.
very sharp, you should compensate the angle downward. This
is contrary to when the start of the uptrend is flat, in which Suggested reading
case you should compensate it upward. The idea is to have a Mikula, Patrick [2002]. The Best Trendline Methods Of Alan
reasonable slope. You can always adjust the trendline later on Andrews And Five New Trendline Techniques, Mikula
using other techniques as price continues to develop. Forecasting.
Vervoort, Sylvain [2007]. “Trading Trendline Breaks,”
Combining different techniques Technical Analysis of STOCKS & COMMODITIES, Volume
It is always a good idea to combine different techniques to 25: September.
confirm the medium-term trend. The thick blue downtrend
line (1) in Figure 9 was broken in mid-March. Just prior to S&C
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Article copyright 2012 by Technical Analysis Inc. Reprinted from the August 2009 issue with permission
from Stocks & Commodities Magazine.

The statements and opinions expressed in this article are those of the author. Fidelity Investments
cannot guarantee the accuracy or completeness of any statements or data.

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