The Insightful Trader

Simple Trendlines – One of Your Best Trading Tools

by on Mar.15, 2009, under Education

Traders of all types, whether they be intraday day traders, swing traders or even long term traders all have their favorite indicators. This is true even if they’re fundamentally inclined, much as I often am. I have friends who have charts with so many indicators in different time frames on them that you can barely see the candles. Indicator lines going everywhere in all directions.

Today’s computers with incredible computing power, not even imagined just 15 years ago and the readily available high speed internet,  let most anyone have a wealth of charts and indicators on their screens. As one of the old school, I can easily remember when all we had was a ticker and quotron machine that took up half your desk and no one was even dreaming about what’s available today. As a budding trader somewhat technically inclined, it was a big day when the new chart booklets came every month so you could draw new lines in them. And forget anything shorter time spanned than a daily chart

In those days if the stock price was above the 200MA you were bullish and if below you were bearish on the stock in general. If you were so technically inclined, and willing to work a lot of hours doing it, then you brought out your straight edge and pencil and quickly learned to draw lines on your new charts. Little 6 inch rulers worked best because the longer ones were tough to use because of the page binding in the books.

As more an more things became available, traders of all sorts quickly migrated to new technology and more and more exotic tools. The one thing that all traders like almost as much as a winning trade, are new toys, especially if perceived to give them an edge. In 2007 there was worry that there would be a serious shortage of mathematicians because all the good ones were either getting hired or starting hedge funds, each competing with more exotic and esoteric trading strategies. As is pretty obvious these days, where were they and their supecomputers in calling the top and getting everyone short, or at least out of their longs.  Whereas anyone with a straight edge, electronic or otherwise, would have lightened up, if not at 1500 then most definitely by 1400 using a simple trendline.

I’ve tried a wealth of various indicators over the years, and as each of us, have my favorites, which by the way I have reduced to just a few over the years. However, my single most favored and unquestionably most reliable is a simple trendline. Invariably if I trade against them, it comes back to bite me more often than not. The great thing about trendlines is that they work equally well in all time frames, whether it be a 1minute chart or a 20 year monthly.

Trendlines are not necessarily going to get you in at the absolute bottom or out at the very top, though an intial break of one can often come very close, in many instances, but they will surely get you in or out in time to capture the majority of the move. I’m not going to give you a course in the basics of how to draw here, you can get that anywhere, but I do encourage you, no matter what time frame you invest or trade for, to add to your arsenal. It might be the simplest and most effective tool you’ve ever used.

spx-10year-weekly-13mar09

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