TREND/COUNTER TREND LINES – PRACTICAL EXERCISE
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Three example screenshots showing trend and counter-trend lines.
I’ve been a bit mischievous with the USDCAD chart – not gratuitously but to hopefully illustrate a point. The swing high at A takes out previous minor swing highs. If this move signals a change of control then the up-trend line would begin at the swing low marked by the blue ellipse (trend line 1). However, it seems more likely that the swing high at point B signals the change of control. If this is the case, then the trend line begins at the swing low marked by the yellow ellipse. This can be extended in two different ways (trend lines 2 and 3). Trend line 2 extends to point C but, arguably, the swing low at C signals a change in control as it takes out a couple of minor swing lows. However, this then ‘makes’ a new swing high which subsequently proves to be the start of a reversal (how permanent is yet to be seen). The trend line 3 does, I think, speak for itself. Personally, I’m torn between 2 and 3, so would appreciate your comments Rich.
(NB – I should say that I have taken a small section of the chart which ‘out-of-context’ with the big picture but, as I said, I wanted to illustrate a point which is that there is often a degree of subjectivity in how we read the charts).
Hi again Gustaf
The GBPCHF and GBPUSD are not really showing trend lines but are indicating ‘moves’ within the prevailing trend. I’ve taken the liberty of attaching a chart of GBPUSD (I’ve opened a plain chart – my current working GBPUSD chart would be confusing!!). The black lines are trend lines (note there are two but the lower of the two is really showing the prevailing trend because the down move from the swing high where it begins ‘takes out’ two important swing lows from the previous uptrend (sorry, I should have marked the points so hope it’s not too unclear). The red lines are counter-trend lines. Hope that helps but if I have confused you please let me know.
Hi Steve,
It’s not confusing the way you’ve set it up. My question then is how long is a trend? Obviously you define it as lasting more than a week or two, which does seem reasonable, but is there a “sort of rule of thumb” indicating timescale?If I am trading on an hour chart then a trend could well be price action over a week?
Or am I missing something?
Gustaf
Hi Gustaf
Identifying trends is, in my opinion, one of the most difficult challenges with trading but, yes, a trend really depends on the time frame you are trading. For scalpers trading a 1 or 5 minute chart, looking at the trend on the 1 or 4 hour chart would indicate whether control for their purposes is with the buyers or sellers. If they were then to look at the daily chart, they might well see that control is with the opposite to that showing on the lower time frame, but they wouldn’t use the daily chart to help with their scalping as it’s too long a time frame.
There isn’t a rule of thumb, it just depends on the price action. As a matter of interest I’ve just looked at the weekly chart of GBPUSD and it’s currently range-bound on that time frame – not really trending as such; and to make things more interesting still, looking at the ‘bigger picture’ on the daily chart for the same pair arguably shows it isn’t really trending on that time frame either!! However, I’ve attached a screenshot, and below is my analysis of that chart. I emphasise MY analysis which may well differ from that of better traders than I am (For quickness, pretend the swing high marked with the yellow ellipse doesn’t exist!!!). Here goes:
Jun/Jul 2014 obvious down trend with the final leg A to B (remember ignore the ellipse-marked swing high).
Points B to C shows a significant rally but it’s too early to say whether the trend has changed because the swing high at A (which ‘made’ the low at B) is still intact.
The important move is D to E because this takes out the swing high at A and signals the possible beginning of a new trend.
However (and ignoring the bits in between), point F has now broken the swing low at D which we know to be important because it was the move between D and E which took out that vital swing high at A. So, we ask ourselves, are we now in a continuation of the original down trend? Only time will tell.
I hope that helps, but Rich’s lessons on identifying the trend FOR THE PURPOSES OF HIS STRATEGY are excellent and should be studied as often as needed. My analysis above is dealing with a much bigger picture but I hoped by doing so it would help.
Trend lines are drawn by joining obvious swing highs or swing lows which will hopefully help to explain why your GBPCHF and GBPUSD examples were not really showing trends.
Hi Steve and Gustaf,
You’ve both been busy this evening 🙂
Steve – going back to your USDCAD chart I’d say lines 2&3 certainly have their place. Even though line 1 underpins everything as the defining uptrend line, and remains in play throughout the duration of that chart, those accelerations in trend are always worth plotting, even just for the sake of a new reference point to use as a target.
Gustaf – one thing to try might be to go back you your chart, just use the area you can see on your screen – don’t worry about scrolling back for months, begin at the left edge of the chart and just start connecting the lows to the subsequent swing lows (during uptrends). And the highs to the subsequent swing highs (in a downtrend). You’ll soon get into the swing of it. And once you’re in the groove you’ll know exactly where to draw the lines, when to adjust them etc… Have another look at the ‘Trend Development in one market’ video for an example of the thinking behind the line placements.
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