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wanted to get out of all your short trades and go long, or buy a contract.
Drawing Trendlines
I like to draw my trendlines across the tops AND the bottom prices. I feel this
gives me a better visual feel for what the trend is doing. You don t have to draw
both lines if you don t want to. Look back at the Cocoa chart and you can see
that I drew both lines on this chart. I think it s just easier to  see the trend this
way.
Confirming The Trend - Getting Three Hits
When you draw your trendlines, you must get three  hits in order to confirm
the trend. Let s look at the following diagram to see what I mean.
1
2 Hits 1 & 2 Begin The Trend
And Hit #3 Confirms It
3
Common $ense Commodities - All rights Reserved 1998-2001 47
Lesson Three_________________________________________________
As you can see, the first two times the price hit the top of the trendline, it
started the downtrend. However, it takes the price hitting the trendline the third
time for the trend to be confirmed. Of course, the same holds true of an uptrend.
What Significance Does This Have?
Remember in school we learned that a body in motion tends to stay in
motion? The same holds true for trends. It takes a lot of energy, or momentum,
to reverse a trend.
You might be wondering how to determine the strength of a trend. There are
several ways I like to do this:
1. Number of hits
2. How long the trend has been established
3. Rate of ascent or descent
Number of hits. The more times the price touches or hits the trendline, the
more valid the trend. This is just plain old common sense again. Ten hits are
more important that three hits. Right? Of course they are. Look at how many
times the trendline was hit on the Cocoa chart.
How long has the trend been established? A trend that is six months old is
obviously stronger than a trend that is six-weeks old; again, just common sense.
Of course, a trendline on a monthly chart is stronger than a trendline on a
weekly or daily chart.
Rate of ascent or descent. One of my students is a pilot, and we were talking
about this once. He used the analogy of how fast a plane is descending. A plane
on a 10% descent is much easier to pull out of the dive than one on a 30%
descent. So keep this in mind when you are looking at trends. Is the trendline on
a nice steady slow descent, or is it in a nose-dive?
48 Common $ense Commodities - All rights Reserved 1998- 2001
_________________________________________________ Lesson Three
Redrawing the Trendlines
Sometimes  Old Man Trend will try and fool you. Let s use some common
sense and see if we can stay on track. In the following diagram, in Example
One, you will notice that the prices kept hitting the trendline over and over, and
then it suddenly breaks out of the trend one day (point #4 in Example One).
What do you do? Is the trend broken? Do you redraw the trendline? The
following diagram may help in your decision-making process.
The way that I suggest is to wait until the fourth or fifth  hit. In Example Two
below, the next hit would confirm that the trendline should be raised, and
connected between points 1, 4, and 5.
On the other hand, if the price did not rise (Example Three), then I would
continue the trendline as it was in Example One, and would consider point #4
where it broke out of the trend as a false breakout.
Example One
Example Two
1
1
2
2
3
3
4
4
5
1
2 Example Three
3
4
5
Common $ense Commodities - All rights Reserved 1998-2001 49
Lesson Three_________________________________________________
How To Tell If The Trend Is Actually Broken
There is no absolute way to be 100 percent sure except to just wait and see. One
way that might help is to watch the closing price each day. If the closing price
is beyond the trendline for two or more days, then it is a good chance the trend
is broken.
Never trade the first day the price breaks the trendline. Wait at least two
days to confirm the trend is broken. Look at the diagram below to see what I
mean.
Trend Intact
Trend Broken
In the above diagram, the top example shows you that the trend is still intact
since the price did not close below the trendline for two consecutive days.
The bottom example shows the trend being broken, since the price did close
below the trendline for two consecutive days. Hopefully, this will keep you out
50 Common $ense Commodities - All rights Reserved 1998- 2001
_________________________________________________ Lesson Three
of some bad trendline breakouts. Sometimes the third day is the one that tells
the true story.
The Magnetic Trendline
Many times you will see the trendline act like a magnet. Look at the following
diagram to see what I mean.
Many times, the trend will reverse from up to down, or down to up. When it
does, you will often see the price hover around the trendline again. In other
words, support becomes resistance, or resistance become support. The prices
tend to hover around the trendline, like it s a magnet.
.
Support Becomes Resistance
(Prices Hover Around The Trendline)
Resistance Becomes Support
One way to profit by this is to use the trendline as support or resistance for
entering trades or for placing your stops.
You can see that this happened three times on the following chart of Aug. 2000
Hogs. Isn t this interesting! So keep your old trendlines on the charts, as they
may act like a magnet and draw prices to them. We will cover this later in more [ Pobierz całość w formacie PDF ]

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