Classic Techniques  |  OCT 2002

The Truth About Trendlines by Thomas Bulkowski

The Truth About Trendlines by Thomas Bulkowski Many of the rumors about trendlines are true. Find out what the facts are here. Is it true that the longer a trendline is, the more significant it becomes? The answer is yes, but this in turn raises other questions. How long should the trendline be to qualify? What is meant by significant? While researching my book Trading Classic Chart Patterns I found lots of platitudes, but little substance. No one seemed to knowhow well trendlines behaved, or at any rate no one was telling. I decided to find out. A BRIEF REVIEW In case you are unfamiliar with trendlines, take a look at Figure 1. Here, downsloping trendlines along daily prices connect the minor highs. This way I can see when the trend changes from down to up (as it did in October 2001, when prices briefly closed above the trendline). Similarly, I draw upsloping trendlines connecting the minor lows. Again, I’m looking for a trend change warning, and when prices close below the trendline, that’s when I get worried. I avoid drawing the trendline through prices, as in the internal trendline shown in Figure 2. To draw internal trendlines, ignore the one-day price spikes (called tails) and base your trendline on what the majority of traders are doing. This way, you move with the crowd and ignore the independents.

by Thomas Bulkowski