Forum Archive Index - February 2002

[Phaedrus <Phaedrus@techemail.com>]

T100,
     There are indeed many alternative methods of drawing trendlines. Closing 
prices can be used, or daily high/low prices. Scales may be linear or 
logarithmic. The line itself may be "best fit", link highs or lows, or be 
derived by means of linear regression. These are some of the more commonly used 
options. One of the basic concepts of trend is that a trend in motion will tend 
to remain in motion. Therefore what we are trying to detect is some objective 
signal when the trend begins to weaken. The breaking of a trendline is one of 
the best early warnings of a change in trend. So, which one to use?

 John Murphy, in his book "Technical Analysis of the Financial Markets" is very 
clear on this point. He states "Trendlines on bar charts should be drawn over 
or under the entire days price range. Some chartists prefer to draw the 
trendline by connecting only the closing prices, but that is not the more 
standard procedure". 

 My personal preference is to use closing prices, and semi-log scaling. I see 
the close as the agreed consensus price, for that day. The daily high or low 
may simply record a single transaction, where one party or the other had a 
sudden rush of blood to the head, and made a foolish mistake. 

 The alternative methods used are all striving to do the same thing in very 
similar ways. They can be expected to give comparable results, overall. Don't 
get too bogged down in the technical minutiae. If you are really unsure, print 
out the chart (close, bar, candlestick, whatever) and pin it on the wall. If 
you can't see the trend from the other side of the room, it isn't there. 

 In many ways, your query is similar to someone asking "What is the best 
oscillator?", or "What is the best trend indicator?"  There is no "right" 
answer, and any choices made are a matter of personal preference.

                 Regards,
                           Phaedrus.


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