Basic trading using trendlines

[Gordon7]

Gordon7, thank you for comprehensive response - much appreciated. From that I'm on a similar track but with a longer time frame and looking also for cash flow via yield.

Hope you'll keep the posting up.

Thanks for your kind words, encouraged me to make a new post under the heading of 'Basing Stocks'.

I actually feel I am getting a lot by contributing a lot of my thoughts here, as I have so much in my head. By putting them in writing it helps me to crystallize them and maybe even question or have further insight into my own methods. Always looking to evolve and adapt.

 

[Newt]

For those of us in the trend following school I'd suggest reading up on some O'Neil or Minervini.

I've tried for many years to use volume as a guide without success, but in recent months realised just how powerful weekly charts can be for reducing noise. Volume seems much more useful to me underlining bull or bear moves on weekly. Nothing wrong with watching daily for big moves, but a longer timeframe is a great tool.

I'm a firm believer in watching for reductions in volatility as a stock comes back to the supporting trend line. Some basic fundamental screens to ensure profitability (preferably improving) helps increase the chance of a longer term move versus short term speculative pushes.

 

[grah33]

Another consideration, one that I like to apply, is the use of channels:
I draw a trendline that runs parallel to the rising support line at a distance determined by interceding tops. When the price approaches the upper channel, I tend to take at least part profit - again on the basis that it's better to lock in profit at a likely turning High point.

very helpful posts. Gordon's approach seems like the best path for a begginer - find several uptrending stocks and trade them. thx for your examples Gordon. got me thinking alot.

when trading price channel patterns , i take it that we are meant to WAIT for the price to go close to the boundaires and that is when we enter, and not in the middle somewhere. correct? it seems that is what i read (to avoid middle areas and wait), as the entry signals on the edges more strongly predict price direction than when in the middle (could go up /down). but the problem is if the price action doesn't go to the edges for some time. so what then?

and with the basic uptrend using basic trendline trading strategy, we don't have to aim to buy at the bottom boundary (can enter above it if that is where it currently is, as price is likely to keep trending higher eventually). however it is more ideal to get in off a lower limit bounce if you can (future upward price action more predictable here).

maybe someone who is experienced can help me to reconcile both of these ideas (the righ approach) for each case so i'm clear on it.

 

[Boggo]

...
I've tried for many years to use volume as a guide without success, but in recent months realised just how powerful weekly charts can be for reducing noise. Volume seems much more useful to me underlining bull or bear moves on weekly. Nothing wrong with watching daily for big moves, but a longer timeframe is a great tool.

Took a while, was wondering when someone was going to look at the next time frame up to establish the larger degree trend.

Compare the chart below with that of the previously posted daily chart of TNE and you will see what Newt means.

[Disc - I hold TNE]

(click to expand)

 

[pixel]

very helpful posts. Gordon's approach seems like the best path for a begginer - find several uptrending stocks and trade them. thx for your examples Gordon. got me thinking alot.

when trading price channel patterns , i take it that we are meant to WAIT for the price to go close to the boundaires and that is when we enter, and not in the middle somewhere. correct? it seems that is what i read (to avoid middle areas and wait), as the entry signals on the edges more strongly predict price direction than when in the middle (could go up /down). but the problem is if the price action doesn't go to the edges for some time. so what then?

and with the basic uptrend using basic trendline trading strategy, we don't have to aim to buy at the bottom boundary (can enter above it if that is where it currently is, as price is likely to keep trending higher eventually). however it is more ideal to get in off a lower limit bounce if you can (future upward price action more predictable here).

maybe someone who is experienced can help me to reconcile both of these ideas (the righ approach) for each case so i'm clear on it.

Hi Graham,
when I'm trading inside a channel, I do wait what happens at the bottom and top; when in doubt whether my lines are correct - e.g. it "looks like" the reversal falls a tick short, I switch to a more short-term chart, even down to a minute. That still gives me the chance to get in or out as close to the line as possible.

As to "if the price action doesn't go to the edges for some time. so what then? " - many traders maintain a time limit. If, after so many periods (days/weeks - depending on your planning horizon), simply sell and look elsewhere. That is a special case of "Plan B", one that always applies if a trade doesn't do what it's supposed to do. It's the same situation as we find ourselves in when we bought at the channel bottom, expecting a bounce, and that bounce doesn't happen, but selling continues lower. You'd simply take it on the chin and sell, right? Or you took profit at the upper channel, and the price keeps rising. Buy some back. Simple. Like any indicator or method, trendlines and channels are no Laws of Nature, but follow the Laws of Statistics. Applied properly over a number of trades, the odds favour the trader. But some trades will move against the odds - so be nimble and adjust your behaviour to changing reality.

 

[pixel]

a little more on

if the price action doesn't go to the edges for some time. so what then?

Assuming I'm not holding the stock in question, neither long nor short. The price continues to rise inside the channel or, in the case of a simple ascending trend, doesn't quite get down to the trendline.
What then? Graham asked.

In a case like that, I consider one of three possible reactions.

1. My original trendline/s may no longer apply. A tentative re-drawing of the old line/s, or a new line could do just the trick and show me a promising Low at which to buy in, if the stock continues to meet all my other criteria.
2. Another option, if the price continues to rise, I may decide it doesn't matter if I can't find a Low: Start buying a half position or even smaller, and top up as it continues to move. Google "Darvas Boxes" for some hints how to deal with rising stocks.
3. Of course, nobody is holding a gun to my head and forces me to do anything with a particular stock. If it doesn't fit my Trading Plan - in this example, the "basic trading using trendlines" - just stay away and look for a stock that does fit.

In order to help decide which option to choose, I look at what I call a stock's DNA. That means I look back over a stock's history to try and detect precedents. Has it traded in channels before? If so, is there a typical or "safe" length of time such a rally may have lasted? Or put Darvas Boxes on and ask the same question. I subscribe to decades of historic data, and I can spread a chart across two or three HD screens. Enough for even the most thorough in-depth study, should I need to. Or I can simply apply the proven old maxim "When in doubt, Stay out!"

 

[Gordon7]

[*]Of course, nobody is holding a gun to my head and forces me to do anything with a particular stock. If it doesn't fit my Trading Plan - in this example, the "basic trading using trendlines" - just stay away and look for a stock that does fit

Absolutely agree. No need to play favourites or have any bias toward any particular stocks. Each case on its own merits.

Here is HSO which gave another clear entry signal this week under the method I have outlined below. The first entry was back in November and you would still be in the trade.



This type of trading need not be unnecessarily overcomplicated. Sometimes we falsely think trading has to be complex if we are going to succeed. I am not under any delusion that even this type of trading has a decent failure rate. The objective is to go with the trend until it is no longer, and it may be that just a handful or less of these types of trades will be big winners in any given year and more than offset the losers and small winners you have along the way.

 

[Newt]

Thanks Gordon. HSO hadn't come onto my radar. Will have to check it out in a bit more detail.
And thanks Boggo for earlier comments.

The great thing about ASF is the reinforcement of good habits you're often exposed to. You can read about techniques (e.g. higher timeframe charts) until the cows come home, but its not until the penny drops on how YOU can use it in your personal form of trading its any use. In the meantime some mentoring on what others do keeps a continuous parade of options up for grabs.

Tech/A has posted explanations on how tight price action and vol at key points in these trending stocks can hint at loss of supply, which can set up the next upward surge. Whether using a VSA approach or just watching ADX/OBV/ATR you may well be able to add additional criteria to your entries that slightly ups the % wins.

 

[tech/a]

Gordon.
What would constitute an exit signal for you?

 

[Gordon7]

Gordon.
What would constitute an exit signal for you?

Hi tech/a,

I'll answer this in the context of my trendline strategy.

Firstly, for a trendline based trade I do not have a target price in mind, nor does it make sense to have one.

If the stock goes parabolic, or hits the upper channel, or generates and confirms something bearish well above the trendline, then I will use my discretion and likely exit the trade or half the trade.

In terms of a trailing stop, in recent months I have completely changed my strategy. This came after visually pouring through chart after chart. I used to have an intra-day stop which only served to suit me psychologically in terms of not wanting to give up profits or minimize any losses. This resulted in too many false exits - rather I should think in terms of risk vs reward (which includes the occasional big hit).
It became clear to me that a much better strategy would be to exit a position if the price closes below my trailing stop (in this play the upsloping trendline) and the next day does not go much below yesterday's close and also recovers above the trailing stop.
For example, if my trailing stop is $9.50 and price closes at $9.45, for the next day my initial auto exit would be placed at around $9.43 (a touch below yesterday's close). If price opens at say $9.45 which is the low but towards the end of the day is likely to close at say $9.48 then I will exit the trade. Above $9.50 and I remain in the trade.

 

[Gordon7]

This is an example of a recent failed trendline based trade on EGP had it been taken, with the exit criteria I gave in my previous post.

I would definitely say that the trendline is no longer valid or a consideration going forward.

 

[tech/a]

Thanks Gordon.

The first trade I presume was exited earlier and before the second trade?

I understand a parabolic exit.

I also understand your exiting if the trend is clearly broken.
The problem is with this type of method is that price will swing away from the mean (That's where the profit is)
Then move back towards the mean---taking a large portion of it back.

A re entry strategy is important I've found. And more importantly as you certainly know and have pointed out---is catching the majority of a move.

Often people miss out on the importance of utilization of funds.They aren't doing you much good as price is reverting to the mean!

Hence my question.
I've just marked up your chart with an alternate suggestion for exits and a suggestion for re entry.

 

[Gordon7]

Thanks for your reply tech/a, and its always good to hear well considered alternate methods of trading. Something to ponder on....

For the first trade which I didn't elaborate on earlier (since it wasn't a trendline play) I would have set a target price in conjunction with a trailing stop. The target price as shown by the red line was $3.93 which by sheer coincidence coincides with your exit on the second trade. How I determine a target price is something I came up with on my own and perhaps best not elaborated upon here.
If I had ignored the target my trailing stop exit would have taken me out at $3.74. My trailing stop is based on ATR.

Let's say I had played this as a trendline bounce. As I stated below my exit would have been taken as price hits the upper channel (or thereabouts), or generates and confirms something bearish well above the trendline, then I will use my discretion and likely exit the trade or half the trade. Again, by coincidence, my target price is about the same price as when it hits the upper channel.



I could be wrong but I believe my method of combining a target price, channel being reached etc with a trailing stop (exit on whichever comes first) somewhat addresses the issue of price reverting to the mean though I never consciously looked at it in this way.

I don't necessarily look to re-enter a trade had I just been stopped out as I consider each potential trade on its own merits. Personally, I would not have taken a trade around the price level you marked as "A" as it doesn't quite fit a pattern I would normally be looking for, and particular patterns play a large part of my trading style.

 

[tech/a]

and particular patterns play a large part of my trading style.

As they should.
Care to elaborate?

 

[Gordon7]

As they should.
Care to elaborate?

Ahhhh tech/a, you'll burn me out at this rate I only ever intended to be a part-time contributor in this forum.

I think a discussion on patterns belongs under its own heading and a few lines on my part won't do it justice. If you or anyone else want to kick the ball off, I'm only too happy to join in.

 

[tech/a]

Ahhhh tech/a, you'll burn me out at this rate I only ever intended to be a part-time contributor in this forum.

I think a discussion on patterns belongs under its own heading and a few lines on my part won't do it justice. If you or anyone else want to kick the ball off, I'm only too happy to join in.

Sorry mate just churning topical interest.
I'll leave it to others.

When I get a contributor with plenty to add I
Tend to get involved more.

 

[Newt]

I gather you guys have some history in the Reef forums. Only saw your introductory post the other day Gordon.
You never know what the amateurs (like moi) will pick up when the pros start exchanging posts. I'll put my popcorn away now. Sigh.

 

[piggybank]

I gather you guys have some history in the Reef forums.

I think it was more likely at Stock Central followed by TNO - Technical Network Organization. Both these sites were started by Austin Hui, who I heard had sold it (TNO) to someone else but it closed not long afterwards.

 

[Gordon7]

I gather you guys have some history in the Reef forums. Only saw your introductory post the other day Gordon.

Guilty !

I think it was more likely at Stock Central followed by TNO - Technical Network Organization. Both these sites were started by Austin Hui, who I heard had sold it (TNO) to someone else but it closed not long afterwards.

and guilty again...