Dear MrktObserver4u re: 11-06-06 05:04 AM Trendlines only work if the trade goes your way. Geez. It would seem to me, and perhaps that's what you were saying, that whatever process (trendlines, Gann time/cycles, pigeon entrails, etc.) one uses to put a trade on, only works if the trade goes your way. lj
Do trendlines work,as in predictive value???? Absolutely not,and to think otherwise would be foolish... But does that mean they have no value?? Absolutely not,and to think otherwise would be foolish I would suggest traders stop looking at trendlines as a magical support or resistance area,and step back for a moment and use their most powerful tool,the human mind to interpert price action... Think for a second what trendlines actually are.Differentiate between a horizontal trendline and a sloping trendline.Try to "equate" a horizontal trendline to a breakout /MA system,and a sloping trendline to a momentum system. Upon a break of an upward sloping trendline should one go short?? Think about it..Use common sense If you are a discretionary trader utilise trendlines as a tool that tells part of the story. Look at volume,candlestick patterns and any other non correalted confirmation signal.If you need absolutes,I would suggest you become a system trader and employ moving trendlines(MA) and then you can easily backtest and answer if trendlines work.....
Trendlines have psychological value for those who draw them, they help to reduce complexity of the chart picture downto human mind abilities
Additionally for charts (market situations) when it's difficult even for different person to draw trendlines differently they help to analyze how the majority of other traders "see" the chart.
Everything we do in trading is based on some kind of predictability. Why would we put on a trade if we didn't think that "based on these combined factors, history shows that a likely outcome is...." That is a degree of predicting. So, for example, if I see a trendline, which is basically a support or resistance area, where price has respected this line 3 times and price is now consolidating at this line and then price breaks this line, I may put on a trade cuz history has shown me that in this type of situation price is likely to move a good amount from this now broken line. That is the prediction. (using a trendline) Is it not ?
The rest of your post has value but the opening statement is rubbish. If you can draw a trendline with a given set of drawing rules and when price reaches it there is a predictable reaction then they have predictive value. So, if you can say that, for a trendline that has been touched 3x there is an X% chance that on the 4th approach it will bounce within Y% of the trendline giving a move of Z% or more then it has predictive value. You can say that (or equivalent things about breaks) so it has predictive value. Nothing foolish about that. Everything you added about confluence of volume, price action, fibs or whatever can add to the probability equation for the trendline. But you could trade it without those things if you wished.
If I might presume that what taowave meant when he said trendlines have no predictive value is that when a trendline is trending in a certain direction there is no reason whatsoever to believe that it will continue to do so. That would seem to be rather irrefutable. On the otherhand when price approaches a trendline and does a certain thing (like bounce or cross it) then it may be that the trendline is serving as a litmus test for some aspect of price dynamics. On the otherhand there is a school of thought that says if you look "to the left" of what appears to be a "trendline event" there is very frequently an older area of support or resistance, and that is what is "causing" the trendline reaction. But then how far back to the left should one look to find this S/R? And what constitutes "significant" S/R? And on and on. What it boils down to then is making some choices for the market you are involved with and seeing whether those choices bear fruit. It is that simple or that complicated but it is apposite to appreciate that TA is a weight of evidence kind of thing, with probabilities assigned for this and that. While possibly not strictly analogous to what we see as traders, the placebo effect is a potent force in many medical therapies - a sort of self-fulfilling prophesy. So even if you think all of this trendline stuff is crap (which I don't), it's probably worthwhile to acquaint yourself with the general tenets. lj
Thank you Li,and you are correct. One really needs to define the term "work" as in "do trendlines work".That is the first order of business. If your definition of "work" is statistically outperform a buy and hold or some other relative performance measure,with some clever programming,the answer is clear and it would certainly refute my first response being called rubbish. I have no interest in debating the obvious,but if one is going to employ trendlines as a "forecasting" tool,I would strongly suggest the use of other indicators that can be statistically backtested.In order to be successful,one needs to have a edge and at a bare minimum tilt the odds in ones favor.Backtesting,optimising( for robustness of backtest)monte carlo's are far more likely to provide that edge than subjectively interperting a trendline. I do employ trendlines,but in more of a "breakout" mentaility.I have long ago stopped beleiving that an upward sloping trendline provides a measure of support.It is sheer folly and is analogous to traders beleiving that a moving average should provide support/resistance. With that said,there are many moving average/breakouts systems that do quite well.But the majority of traders that employ them successfully certainly dont look at an MA as being predictive.In fact,I would venture to say that they employ trend following techniques due to the beleif that the market is unpredictable,but certain patterns/trends do occur over and over. To each his own
Because you can't do the analysis or make it work doesn't mean that others else can't do the analysis or make it work. But that's just as well or trading would be easy, right? To each his own