[ Answer to Trendline Questions ]
Scott's Question:
How far do you go back and why?
Depending on how long I expect to hold the stock (i.e. short term, intermediate term, long term), I will adjust the charts accordingly. So if I were only interested in a short term trade, then just a few month's worth of information might suffice. But I would feel blind-sided if I did not always take into consideration the direction of the longer term trend, which would span at least two years for me, since the direction of the main trend influences the statistical odds of upside or downside movement. Use these odds to your advantage by trading with the trend.
The two-year number is just an arbitrary number, but when available, I would stretch it to as many years as possible until I got the highest high or lowest low, depending if you are looking at an uptrending or downtrending stock.
Question #2:
Secondly, should you make an effort to look at closing prices?
I do. I use it for added perspective, as it sometimes signals breakouts or changes in investor sentiment before it becomes evident on the O-H-L-C charts. I've played some Ascending Triangles when the Close-Only charts showed a breakout, which allowed me to get into the stock before the O-H-L-C indicated a breakout.
To give an example, let's use Isis Pharmaceuticals (ISIP). On the O-H-L-C chart, if the period under consideration is from October, then I would see a breakout occurring at a close above 15 1/8. But the astute trader could have seen the upward move earlier by looking at the Close-only chart and would have noticed that on 3/11/98, a small breakout from a Wedge had occurred (at $13.94). But the Close-Only chart reader would not realize that there was some resistance at 15 1/8.
To be effective, both types of charts should be considered.
So in a sense, it can kind of be used as a leading indicator, but I wouldn't put complete reliance on it, because the true factors of supply and demand still exist at levels not shown on the Close-Only chart. For example, if there was a major sell-off at levels higher than that day's close, then I would use that higher level as the hurdle point to get over, to be safe.
So to answer your question, the period under consideration may be completely arbitrary--you do nothing wrong by looking at a short term or long term time frame. But one thing does need to be consistent, and that is the method in drawing trendlines as outlined in the Web Page. Whether you exclusively use O-H-L-C charts or Close-Only charts, the principles involved in drawing the trendlines remain constant; the time frames are not.
Hope this helped.
Regards,
Rainier |
