Trader Vic and the Art of Drawing a Trendline

Discussion in 'Trading' started by Starn, Jun 8, 2003.

  1. Starn


    Greetings All,

    First off an introduction since this is my first post here on Elite Trader. I am quite new to this site and am a novice EOD position trader with only a few years under my belt. I do not trade as my full time job. That said, on to my question:

    I am currently reading Victor Sperandeo's book "Trader Vic- Methods of a Wall Street Master". I have hit a wall on Chapter Seven "Where Fortunes are Made: Identifying the Change of a Trend". I am hoping that someone familiar with this book can clear this up for me.

    Figure 7.1 in my copy contains a chart of 1989 Live Cattle Futures and displays an uptrending trendline. In my mind, if I was drawing the trendline in "real time" the line would have been drawn from the stated lowest low to the next pull back which occurred around the first of July. That trendline would have also come close to the pullback in the first of August. After that the commodity did make two lower highs after the August peak. I realize that trendlines are an art form but I can't help questioning wether I am missing something critical in my interpretations of this book! Also, I understand why Vic drew the trendline the way he did in hindsight, it is just that if I where watching this commodity daily I would obviously not have the luxury of looking two months ahead for the next highest high.

    If any of you could shed some light on this for me I would greatly appreciate it. After re-reading my post and re-examining this chart I am thinking that this is the nature of the trendline beast.

    Best Regards,
  2. opw


    A lower high means nothing in an uptrend except that probably some kind of consolidation is forming.

    In an uptrend you draw the trendline from the lowest low to the lowest low preceding the highest high.

    At that point in time the highest high was in oct., so no pullback in between should penetrate the line.

    However, if you would draw the line anytime in aug., it might have been broken, in aug., but then again it might not, because you can not see prices before may.

    I think the valid point of Vic's book is that he defined a consistent way how to draw trendlines.

    Trendlines do not work out everytime, but it are still one of the most usefull tools imho, as are support and resistance

  3. fan27


    trend lines are often broken, only to be re-drawn once a higher high is made.
  4. He may have drawn it that way originally...He may have originally
    drawn from the low in Jun, to the low in July and then went short on the 2B in August.

    I think he was just trying to give a clear example. Like the
    other poster said, you need to adjust your moving average as it is broken and price continues in the direction of the major
    trend. And don't run the trendline through prices.
  5. dbphoenix


    You're correct, and you're not missing anything.

    In realtime, the highest high would have been in August. Therefore, your line would have been drawn as you suggested. Shortly thereafter, however, that TL is broken, which constitutes a change of trend (not a trend reversal, but a change of trend).

    Now you have to wait for the high to be tested, and most people can't stand to wait for it. Rather they skip ahead to the next criterion and use the drop below the last reaction low to define a trend reversal. Trouble is, this is often the better course to take since what had been the highest high can turn out to be a 2B, and sitting there waiting for the next test can be a long wait, and you're back at breakeven.

    In any case, the price makes a 50% retracement, then rallies not only to test the August high but to make a new one. At this point, your June-Aug TL can be rotated downward so that it is under the September low.

    Because the "highest high" is sometimes not tested, you may decide that your best course is to exit at the TL break or even a break below the last reaction low, depending on how far the LRL is from the TL break (if it's too far, you may feel you're giving up too much). Then, once you're out and have money in your pocket, watch the price to see how it behaves at the 50% retracement level. If it looks as though it's going to recover, you can re-enter. Or you may want to wait for a test of this level and a higher low. If it doesn't work out, you're out and you still have a profit. If it does, you wind up with a larger profit than if you'd stayed in and hoped for the best. And, of course, if price drops below the 50% level, you can trigger one of your shorting tactics.

    Incidentally, the fact that you've had to rotate your TL downward suggests that momentum is slowing. This is not necessarily a bad thing since a more gradual trend is easier to sustain than a parabolic one. However, you may want to adjust your trade management tactics to account for this change in the trend's character.
  6. Starn


    Thank you all for your comments. After stepping back and reading your posts I was able to go back and make sense of the points in that chapter that were throwing me off.

    Good Trading
  7. being able to draw a trendline is the first step to truly understanding trends. May seem very simple, but its fundamental. Trends are what its all about.