Stocks & Commodities V. 24:11 (36-44): Building Automatic Trendlines by Giorgos E. Siligardos, Ph.D.
Here’s a simple mechanical method for automatic trendline construction using monoparametric trendlines.
Despite the continuing evolution in technical analysis tools, almost all of the earlier forms of charting techniques are still being used, in exactly the way
they have been used for decades. Though the implementation of trendlines by chartists has been around a long time, an algorithmic approach to trendline construction is not yet available. For the mechanical construction of trendlines I will introduce a simple algorithm, one I call monoparametric trendline. It is based upon one parameter (hence the term “monoparametric”), which specifies the magnitude of price swings taken into account.
DOES THE TREND DEFINE THE TRENDLINE?
If the concept of a trend is defined as the directional movement of price, then the existence of a trend does not necessarily imply that a trendline can be constructed — for example, the case where price advances for several consecutive days clearly show a directional movement, although no trendline can be constructed unless downward corrections take place.
Then there’s the definition that John J. Murphy gives in his book Technical Analysis Of The Financial Markets, that the trend as the direction of price peaks and troughs. According to Murphy, an uptrend is defined as a series of successively higher peaks and troughs, and a downtrend is defined as a series of lower peaks and troughs. This definition, of course, involves the existence of both peaks and troughs, and in such case, the bond between trendlines and a trend is unbreakable.