Forum Archive Index - December 2001

[Phaedrus <Phaedrus@techemail.com>]

Trader 100 - some answers for you :-
 <<< There are several references in Pring’s books to trendlines being 
considered as zones.  The implication being that a trendline doesn’t 
necessarily need to be touched for it to be confirmed.  I notice that you are 
very careful to draw trendlines that touch the price action when you are using 
closing price charts but several of your trendlines on candlestick charts seem 
to be working on the “zone” theory.  Could you please reconcile these 
approaches.>>>
  I tend to vary my approach according to the individual stock, and its 
characteristics. Broadly speaking, I use whatever techniques give the "line of 
best fit". So while I almost always use closing prices and log Y scales, I do 
sometimes use linear scales with bars or candlesticks and draw the trendline 
using lows or highs. Whatever it takes to best capture recent history as a 
straight line, thus making it easier to see any significant deviation from the 
previously orderly progression. I have always considered support and resistance 
levels as zones, and trendlines are really nothing more (or less) than sloping 
support or resistance lines. 

<<<I notice in the WHS candlestick charts 
(http://www.sharechat.co.nz/archives/2001/08/msg00369.shtml) you have joined 
the highs on the candlesticks rather than the closes.  What is your rationale 
for this?  I have always thought that the close was the best price to use in 
trend analysis.>>>>
These are Swing Charts. The blue lines here are not trend lines, but are 
plotting the ranges traversed by alternating swing highs and swing lows. Swing 
charts can be used as the basis of a simple trading system, and make it easier 
to see changes in trend as they occur. Keep in mind the fact that a trendline 
break and a trend change are two different things. A change in trend can come 
before or after the trendline break. The Close, being the most important price 
of the day, is the one most commonly used for trendline (or any other) analysis.

<<<I am also interested in your philosophies regarding trading trendline 
breaks. There seem to be at least four approaches:
1. Waiting for a close below an upward sloping trendline before selling 
2. Waiting for a break of a downward sloping trendline AND for the stock to be 
in an uptrend
3. Waiting for a break of a downward sloping trendline AND for a long lower 
shadow (buyer support), and a close at the high for the day. (White Closing 
Marubozu) before buying 
4. Waiting for price to move a pre defined distance from trendline (Pring 
advocates 3%)
Can you please reconcile these approaches.>>>>
 It all comes back to risk/reward ratios. The fewer the signals you act on, the 
earlier you act, the more you make if you are right, the less you lose if you 
are wrong, BUT the more often you are wrong. The more risk averse you are, the 
more confirmatory signals you would need before acting. So, these different 
approaches need not be reconciled. They represent different approaches, such as 
would be used by people with varying attitudes to risk and its management. 

<<<< Do you vary your approach based on recent price action in the stock? Or 
some other indicator? >>>> 
 Recent price action is, for me, the most important single determinant as to 
whether I buy/sell/hold. There are many other important factors though. These 
include fundamentals, world events, news, overseas market movements (especially 
the Dow) etc etc. The specific technical indicators that I use are typically 
selected by their historical performance with the stock in question 
(backtesting) Good backtest results do not ensure success, but bad backtest 
results pretty much guarantee failure.

<<<< Do you use the same approach for both buying and selling? >>>>
More or less, except that my entry rules are much more stringent than my exit 
rules. I would normally require the agreement of three or more different 
signals before buying, but (depending on circumstances) may sell on only one or 
two signals. A minimum Buy for a conservative trader might comprise :-
(1) A break of an established downward Trendline.
(2) A new uptrend (higher high after a higher low)
(3) A momentum oscillator buy signal (RSI, W%R, Stochastic etc)
(4) A bullish Candlestick pattern 
 Everyone has their own ideas and their own systems. Ideally, the aim is to act 
when indicators of different classes agree (eg trend, momentum, volatility, and 
market strength indicators)
There is no right and wrong though. The more actively you manage a trade - the 
more closely you monitor its performance - the more risk you can run by acting 
on fewer signals, since you would quickly terminate any trade that turned 
against you. 
 The most important thing, to my mind, is to be absolutely clear as to the 
timeframe in which you intend to operate, and use systems appropriate to that 
timeframe.
 Hope this clarifies things a bit.
           Phaedrus.

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