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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: Scott H. Davis who wrote (449)	3/16/1998 12:02:00 AM
From: HeyRainier	Respond to of 1720

[ 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

To: Scott H. Davis who wrote (449)	3/16/1998 9:31:00 PM
From: ftth	Read Replies (1) \| Respond to of 1720

Hi Scott, as I'm sure you know, few people construct trendlines consistently. Ten people looking at the same data will draw them differently, perhaps sharing some areas of commonality. Even the same person, given the same data 10 days later will likely draw the trendline differently. Some people refuse to let the trendline pierce any other data, while some allow this, and some will allow it sometimes. People will also unconsciously draw the trendlines to fit their desired scenario, even if it's inconsistent with the way they typically draw them. Also, some require a minimum number of "touches" of the line, or base the strength/validity of the line on the number of touches. What constitutes "penetration" of the line varies from person to person also. Such a seemingly simple indicator, yet I'd venture to guess that it is actually one of the most complex of technical indicators to get a handle on, and the fact that few professionals use it consistently AND accurately (which don't necessarily go hand-in-hand) is testament to its underlying complexity. You have to develop the consistency part first, then work on the accuracy. This means you need to start with several consistent, rigidly defined ways of drawing them (no subjectivity allowed). Once you have these, you determine which is the most accurate for the way you're using it. A couple of things to think about: Regarding use of close versus hi/lo for trendline boundaries, I think to some extent it depends on how you are trading the stock. If you have a stop set (which can trip intraday), then using only the highs and lows makes the most sense because the intraday swings WILL affect your position. You WANT the trendline to represent the extremes of sentiment through the day. If you close a position out only when it CLOSES below/above a certain point, then using the closing prices to construct the trendline makes the most sense (to me, anyway) because the intraday extremes play on a different sentiment than the closing price changes. To see what I mean, look at the volatility of the daily range (high minus low) versus the volatility of the closing prices (close minus close yesterday). These can be 2 extremely different looking charts. Just some food for thought. Also, you may experiment with creating your trendlines from right to left, rather than the conventional left to right. That way your initial focus is on the more recent data, which carries more significance. Just draw 1 short term line starting on the right. Then draw an intermediate line and a long-term line, also starting from the right. Some charts it doesn't matter, but in general I bet this will give you some more "consistency" candidates to play with if you thought you ran out of ways to draw them from using the "left to right" method. I came across this when trying to program a purely mechanical trend line drawer. I found I always had to look beyond the trendline breakpoint to validate that it is in fact a breakpoint, so starting on the right just made the most sense. dh