Tools of the Trade: All about trendline'sI get a lot of questions on how do I seem to make such accurate trendline's, channels and support's and resistance. People seem to be impressed how often the lines on my chart are right where price seems to always react. Well this is as it should be, as your lines are markers where price action might do something interesting. But what is my trendline or support/resistance is probably different from yours. I will try to show my thought process on how I draw these lines. These tips work for me and they might work for you. But sometimes you have to fuss around some to find what works for you. This is because we all see different things.
I will start with a trendline and I will use the GC (gold futures) chart. These methods work on all charts and all timeframes.
We first want to find and connect at least 2 points in any given trend.
Now in this case I connected the tips of the wick, but really for me anywhere between the open and the tip of the wick or the close and the tip of the wick is a valid area for a trendline. Now you may say, "great! but any 2 points make a trendline so what's the big deal?". You are right, 2 points do not make a trendline but this will be a start. So I can fuss around and pull my trendline down and to the left manually and try to find other areas that fit my trendline. But this will cause bias and we want to eliminate bias as much as we can. So what do we do to minimize bias?
1. Open up the settings for your trendline (click on the trendline and then click on the gear icon in the selection box).
2. Click the "extend trendline left" box. This is what you should see now for this example:
Now you look at it and say, well that doesn't look valid because it goes through a bunch of candles in the yellow and orange ellipses.
But now let's take a closer look at the orange ellipse area:
look at all the blue arrows and that the trendline goes right through the wicks. This adds validity to our trendline.
Now you may ask, what about all the bodies that the trendline goes through (see yellow arrows)? Does this matter?
A different question though is does the trendline really go through the body pointed out by the yellow arrows? Let's take an even closer look!
This looks pretty good to me. But what happened? I moved to a higher timeframe. I like to move at least 3x timeframes higher. Now you can see that the trendline goes through the wicks of the candle or at least pretty dang close. And because it is well known that looking at a higher time frame is always a good idea when entering a trade for confirmation this also applies to trendlines. A trendline that is still a valid trendline on a higher timeframe is an even stronger trendline.
Now look at the yellow ellipse in a 3x higher time frame:
Nope, that doesn't look good.
Let's move to a 6x higher timeframe (12 hour)
Nope, still doesn't cut it!
But it does fit okay, not great on our initial 2 hour timeframe chart, we just can't confirm it on a higher time frame. So I say the trendline get's weaker around here:
Another way to confirm an appropriate trendline is to use RSI (or any oscillator of your choice that shows overbought or oversold)
The vertical red lines show that RSI is in the oversold area as price approaches or dips below the trendline. This is what you would expect right? especially since in these areas the price is coming from a downtrend.
The blue vertical lines show that RSI is between 70 and 30 as we would expect as price seems to be consolidating around the trendline and actually tickles the overbought area at the price peak between the 2 blue vertical lines. This is also as you would expect.
So these are my tips on trendline's and how I use them. I hope this is useful. Next tutorial I am going to go into how I do support, resistance and parallel channels.
I hope this was helpful and I hope everybody makes money off these tips. Otherwise, play around with trendline's in your own way and you might find something that works better for you!
Thank you!
Miss Bunny
