Novice Traders' Notebook  |  DEC 1998

Plotting Trendlines by Stuart Evens

Drawing trendlines may seem simple, but there is a right way and a wrong way to plotting trendlines. With so many different indicators, oscillators, and moving averages making up the science of technical analysis, it is easy to forget about the basics. One basic rule of most trading strategies is to always trade with the trend, and it follows that early recognition of a change in trend would be important. Therefore, it is imperative that we apply techniques to determine what the initial trend is so that we can either trade with it or be in a position to recognize when it has, in fact, changed direction. Drawing a trendline can help us with both of these goals. For our trendline to have credibility or predictive use, the method used to draw it must be consistent, reproducible, and objective. Without a clearly defined method, it is too easy to choose prices through which to draw the trendline based on how we want the line to look because of our preconceived ideas of the market we are charting. Our investment decisions need to be methodical, consistent, and based on facts, not emotions or wishful thinking. Once we have our definitions and our method, we will be able to walk through the proce-dure for constructing a trendline.

by Stuart Evens