by Helmut Schmidhofer
Trendline analysis is probably the oldest and simplest chart reading method. It produces
consistent profits with stocks, futures and currencies.
The diagram depicts weekly interbank rate candlesticks of the Australian Dollar in
US Dollars (AUD/USD) for 52 weeks to 29 January 2007.
You will note two things - (i) trends persist for several weeks; and (ii) allowing for
generous slippage before a position is reversed, there is still plenty left in the move.
The trendlines are drawn by eye along the highs in a downtrend, and along the lows in an uptrend.
A change in trend is signalled when prices break out of the trendline. One must not be too
eager to call a new trend, therefore, some slippage will invariably occur.
For example, the last uptrend line could have been steeper, which would have produced a false
signal halfway up the move. Also, the reversal signal chosen for this example is too feeble.
You would have been stopped out when the price spiked up.
You cannot pick market tops and bottoms with trendlines, but if you are serene you can make
consistent profits whether you are trading shares or futures or currencies.
On the chart, the number alongside the direction arrow is the profit in pips. I suggest you get
hold of a set of weekly data of volatile shares, commodities and currencies and practice the art of trendline reading.
The trend channel is based on a linear regression of the one-year data. If you are a
conservative trader, you will trade only with the channel and never against it, so with the last
signal you would close your longs but not go short.
From inspection, the channel could be flattening out, but it is still in an uptrend.
A little-known method called SCHM for "spaced centered harmonic means" is more likely to let you pick market tops and bottoms. This is discussed next.
Back to fundamentals v technical Proceed to SCHM bands
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