Stocks & Commodities V. 25:9 (20-28): Trading Trendline Breaks by Sylvain Vervoort

Stocks & Commodities V. 25:9 (20-28): Trading Trendline Breaks by Sylvain Vervoort
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Trading Trendline Breaks - PT 2 by Sylvain Vervoort

Trendlines are common technical analysis charting tools, but there are a number of ways to implement them in your trading. Hereís an in-depth look at trendlines.

Previously, I discussed how trendlines are plotted, emphasizing that logarithmic trendlines are more effective than linear ones. This time, Iíll discuss how to trade breaks in trendlines as well as the system I apply to my trading. A long-term investor using monthly data could act upon a number of trendlines in Figure 1. Assuming you can trade this stock both long and short:

1. At the end of 1992 the closing price breaks through the downtrend line. This is a buy signal.

2. After a first reaction, the price moves up again during the second half of 1993. This is a clear second pivot point for drawing a longer-term uptrend line. Note from this point on that the price is accelerating and with time, moving farther away from the uptrend line. The best thing to do when this kind of move develops is to follow the new move with a new trendline, as shown.

3. Beginning in 1994 the price drops below the uptrend line. Itís time to close the long position and open a short one. The idea is to buy the stock back at a later date for a lower price so you can make a profit.

4. In the second quarter of 1995, the price rises above the downtrend line. This is a signal to close the short position and open a new long one.




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