Stocks & Commodities V. 25:10 (40-46): Trading Trendline Breaks, Part 3 by Sylvain Vervoort

Stocks & Commodities V. 25:10 (40-46): Trading Trendline Breaks, Part 3 by Sylvain Vervoort
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Trading Trendline Breaks, Part 3 by Sylvain Vervoort

Previously, I discussed how trendlines are plotted and how they can be used. This time, I am going to show you Abercombie & Fitch Co. (ANF). The numbers here represent the labels on the chart displayed in Figure 1:

1. There is a clear downtrend line break. There is a buy signal generated by the trendline break simulation system (green up arrow) at about the same level of the trendline break. You open a long position. Typically, you would set a stop-loss just below the previous low.

2. The next trend is up.

3. In February the trend starts accelerating. You could either go for the red uptrend line at the beginning of the acceleration or the blue uptrend line that starts shortly thereafter, which is even sharper. Applying the trendline rules as proposed in part II, you would, however, end up trading along the red uptrend line.

4. The end of the sharper uptrend line is not important because you would end up closing your position at around the same price (the blue exit sign), whether you are following trendline 3 or 4.

5. The sharper uptrend line that initiates from trendline 3.

6. The last top is a typical example of a sharp move down at the top. In such a scenario, you should wait a couple of days before you start to draw the downtrend. This is because you want it to start from a different bar than the high bar. When this downtrend line is broken, you can open a new long position.

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