Understanding the Significance of a Trendline
We want to trade trendlines, but not all trendlines have equal importance. Whether price has touched a trendline or violated it, we should act based on whether the trendline is significant or not. The following three factors are usually considered when evaluating the significance of a trendline: the length of the line, the number of times it has been touched, and the angle of ascent or descent.
1. The length of the line: Since a trendline measures a trend, the longer the line the longer the trend it is monitoring and the more significant the trendline.
2. Number of times the trendline has been touched or approached: The larger the number of touches or approach to a trendline, the more significant is the trendline. Note that because a trendline represents a dynamic area of support and resistance, each touch or approach increases the significance of that trendline because it better represents the underlying trend. Some traders tend to ignore a move close to the line, that is, an approach, but this is as significant as the actual touch. This USDZAR trendline has two factors working for it. One, it is long, extending from March 13 to April 2 and has a good number of touches.
3. Angle of ascent or descent: A very sharp trend is difficult to sustain and liable to be easily broken by a short sideways movement. Flatter trendlines or lines with smaller angles of ascent or descent then are better in reflecting price. Since steep trendlines are likely to be violated much easily, the violation of a particularly steep trend is not as significant as the violation of a more gradual one. That is why the penetration of a steep trendline usually represents a continuation rather than a reversal break. The following chart shows a steep USDTRY (dollar Turkish lira) trend that resulted in a continuation of the prevailing trend.
Measuring implications: Trendlines have measuring implications when they are broken. The measurement is calculated as the maximum vertical distance between the price and the trendline. The distance is then projected in the direction of the new trend from the point of penetration. This is known as the measuring objective. It should be noted that measuring objectives in trendlines are sometimes misleading because when a trendline violation turns out to be a reversal, objectives are usually reached and exceeded. Therefore, you should take the measuring objective as more of a minimum expectation. The chart below shows how the measuring objective can be calculated for a GBPUSD uptrend, taken from the maximum vertical distance between the price and the trendline.
1. The length of the line: Since a trendline measures a trend, the longer the line the longer the trend it is monitoring and the more significant the trendline.
2. Number of times the trendline has been touched or approached: The larger the number of touches or approach to a trendline, the more significant is the trendline. Note that because a trendline represents a dynamic area of support and resistance, each touch or approach increases the significance of that trendline because it better represents the underlying trend. Some traders tend to ignore a move close to the line, that is, an approach, but this is as significant as the actual touch. This USDZAR trendline has two factors working for it. One, it is long, extending from March 13 to April 2 and has a good number of touches.
3. Angle of ascent or descent: A very sharp trend is difficult to sustain and liable to be easily broken by a short sideways movement. Flatter trendlines or lines with smaller angles of ascent or descent then are better in reflecting price. Since steep trendlines are likely to be violated much easily, the violation of a particularly steep trend is not as significant as the violation of a more gradual one. That is why the penetration of a steep trendline usually represents a continuation rather than a reversal break. The following chart shows a steep USDTRY (dollar Turkish lira) trend that resulted in a continuation of the prevailing trend.
Measuring implications: Trendlines have measuring implications when they are broken. The measurement is calculated as the maximum vertical distance between the price and the trendline. The distance is then projected in the direction of the new trend from the point of penetration. This is known as the measuring objective. It should be noted that measuring objectives in trendlines are sometimes misleading because when a trendline violation turns out to be a reversal, objectives are usually reached and exceeded. Therefore, you should take the measuring objective as more of a minimum expectation. The chart below shows how the measuring objective can be calculated for a GBPUSD uptrend, taken from the maximum vertical distance between the price and the trendline.
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