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What are The Pros & Cons of Drawing Support Trend Lines using HCL Bars compared to EMAs ?

It seems that most support lines are drawn from the bottom of HCL Bars. Are there advantages of doing this compared to drawing them from e.g., an EMA of 20? Are there other relevant points to draw the support lines?

Best Answer

  • AkromaAkroma
    Accepted Answer
    I have to agree with markd. Tred lines (except for horizontal ones) are completely subjective. Just the fact that there are so many ways to draw them makes it subjective.

    Compare them to a moving average defining a trend: the MA is either up or down. It does not matter how you look at it. Those are objective and imo a much better way to define a trend.

Answers

  • markdmarkd mod
    edited February 2015
    I've never understood the validity of trend lines. There are no firm rules for drawing them. They are in the eye of the beholder. So if you want to draw them from EMAs, why not? With HCLs, if you are honest about it, you are constantly re-drawing them, as they are getting broken constantly without actually signalling a meaningful change in trend. In hindsight, they often appear to "be there", but in real-time you just don't know whether you have a valid one or not (at least that how I behold it). If someone knows of a rigorous study of trend lines drawn with consistent rules that shows they are useful, I'd love to hear about it.

    One form of trend line that is mathematical is the Raff Regression Channel, available on the annotation tool. I think the signals are late, but that's a style question. At least you can study them objectively and have an idea of the odds of a successful signal.

    Personally, I think Price Channels of various lengths are more helpful. These are like "horizontal" trend lines, and they are objectively based on past reversal prices. I like 10, 21, 63 and 251 day channels. In a well behaved up trend, you will often get a playable reversal off the break of the 21 day lower channel (sometimes, the 20% level of the 21,1 Stochcastic). The mid channels are also often helpful in different markets.

    Here are some useful links on StockCharts (especially the second from Greg Morris' blog):

    https://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:trend_lines

    http://stockcharts.com/articles/dancing/2014/11/trendlines.html

    https://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:raff_regression_chan
  • I suggest that you check out John Murphy's book for the basics of trend analysis. Also, if you follow his market message, you will find many interesting and useful ways to use it.

    I'm still a relative newcomer to technical analysis, but I now use basic trend analysis much more than I did at first. Its beauty often lies in its simplicity, and it works!

    There are no hard and fast rules for drawing trend lines. Downtrends are usually drawn from the tops of the bars, and uptrends are drawn from the bottoms. Usually the lines are drawn using the intra-day highs and lows, but occasionally you might want to use an opening or closing price instead. Choosing where to draw the line is important to getting the trend right. Lately I've been using the Wychoff method. You can find detailed instructions in Bruce Frazier's blog on StockCharts.
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