The Future of Investing

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Examples and interpretation of many commonly used indicators.

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Custom explorations, indicators and trading systems.

Price Charts
Examples and interpretation of all charts used in technical analysis.

Trendlines

Description

It's difficult, if not impossible, to provide information on a topic as complex and multifaceted as trendlines in the small area available here. The best source to learn about trendlines and chart patterns is the book Technical Analysis of Stock Trends.

General

A trendline is a sloping line drawn between at least two prominent points on a chart. Rising trendlines are usually drawn between two troughs (low points) to illustrate price support while falling trend­lines are usually drawn between two peaks (high points) to illustrate upside price resistance.

The consensus is that once a trend has been formed (two or more peaks/troughs have touched the trendline and reversed direction) it will remain intact until broken.

That sounds much more simplistic than it is! The goal is to analyze the current trend using trendlines and then either invest with the current trend until the trendline is broken, or wait for the trendline to be broken and then invest with the new (opposite) trend.

One benefit of trendlines is they can help distinguish intuitive decisions ("I think it's time to sell...") from analytical decisions ("I will hold until the current rising trendline is broken"). Another benefit of trendlines is that they almost always keep you on the "right" side of the market.  When using trendlines, it's difficult to hold a security for very long when prices fall just as it's hard to be short when prices rise--either way the trendline will be broken.

Trendline Angles

MetaStock Pro provides two commands that deal with trendline angles: Gann Lines and Trendline by Angle. The following discussion explains how these com­mands function and their differences.

There are basically two ways to quantify the angle of a line drawn on a chart. The first method is relative to the computer screen (or the piece of paper). If you draw a line at 45 degrees using a protractor on the screen, the line should rise by one inch for each inch it extends (runs) to the right. This 45 degree angle also could be expressed as a slope of 1.

The Trendline by Angle commands work in this manner--relative to the computer screen. We say it is relative to the computer screen because we are discussing inches, not prices, on the screen. Regardless of how many days are displayed or what the x- and y-axes of the chart are set to, a 45 degree angle will slope up and to the right at 45 degrees relative to the computer screen.

A second way to quantify the angle of a line drawn on the chart is relative to the x- and y-axes of the chart itself.

A 45 degree angle relative to the x- and y-axes would rise one y-axis unit (point) for each x-axis unit (day) that the line extends (runs) to the right.

This is how Gann Lines are drawn: relative to the x- and y-axes of the chart. The difference between these two methods, i.e., relative to the screen (inches) or to the axes (points), is substantial.

Gann Lines specifically ask for the ratio, i.e., the periods (run) and the points (rise).  If you enter 1 x 1, you will get a line that rises one point for each day it travels to the right. The line may or may not appear to rise at 45 degrees relative to the screen, depending on how many periods you have loaded and how the left scale (y-axis) is set.

If you want a 1 x 1 Gann Line to appear to rise at 45 degrees relative to the computer screen, you will have to use the X- and Y-Axis Parameters dialog to manually adjust the x- and y-axis.

The Trendline by Angle command draws trendlines relative to the computer screen. Changing the x- and y-axes will have no effect on the angle of the trendline.