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.