I've been writing some about trend lines lately and noted my observation, in quite a few of the articles, of the declining use of this useful charting tool. I don't have any illusions that a couple of articles by a reasonably unknown author will have any effect on the use of these lines but if just a couple of traders see the value of trending lines and e-mini trading, then I suppose I have carried out my job.
Trend Angle
You would assume that a sharp e-mini trend angle (1 a lot more than 60 degrees) would result in a longer sustained e-mini trend, on initial consideration. But several authors (Bulkowski and Murphy) along with some much less comprehensive back testing on my element, has shown that sharp trend angles frequently result in considerably shorter trends. (and hence, less profit) I thought about this some, and the result makes sense in that a substantial number of traders are required to simultaneously trade in the identical direction in order for the trend to continue at a sharp angle if we set aside the occasional low volume rally, a tremendous quantity of trading to 1 side of the industry is expended in sharp angle trends and to maintain that angle and intensity of a trend intact would entail an really broad level of participation by participants in a given e-mini contract. Is this likely? Not truly, as the sharp trend level continues there would be a substantial number of traders who would determine the marketplace has covered a considerable amount of actual estate and look to take profits, though others would determine (at some price level) that the industry has reached overbought or oversold levels and look to trade in the opposite direction. Sharp angle trends tend to be substantially even more brief-lived than their flatter angled e-mini trends. The greatest trends turn out to be trends in the 30-40% range.
Length and Touches
The length of a trend relative to efficiency turns out to be much less of a surprise. Extended lines tend to perform improved than brief trend lines. With no heavy obtaining or selling pressure (based upon whether the trend line is moving up or down) the market place can retain a reasonably constant level of buying or selling in the same direction. This level of "asymmetrical equilibrium" (a term of my own invention) is extra sustainable and results in longer lines covering way more ground. Given equal trend angle, it stands to reason that shorter trend lines will cover much less ground. No true surprise in this observation, but how several people today honestly take the time to think of trend line length and how it might influence possible profitability?
When discussing assistance and resistance (SAR) it has been identified that the extra touches and subsequent price rejection along the SAR, the significantly more robust the line becomes. Once more, it will need to come as no surprise that the exact same relationship holds true for trends. At the beginning of my trading career, in the early '80's, the "old-timers" insisted that the additional touches along a trend would result in a trend line that was additional robust. I just accepted it as a truth, and it turns out that the far more peak or valley "touches" along a trend line that result in cost rejection, the greater the potential profit in the trend line. Conversely, trend lines with less than 3 touches had a greater probability of being breached. (Bulkowski and Farmer) I suppose widespread logic would dictate the truth of this assumption, as significantly more prosperous tests of a trend line that result in value rejection creates, at the really least, a psychological image in traders' minds that the line will prove, in the long run, to be a tough task to breach.
In summary, I have stated that sharp angle trend lines tend to be less lucrative that gradual sloping trend lines. Additional, I have stated that longer trend lines with alot more touches resulting in cost rejection tend to be a lot more robust than less touched trend lines. Although neither of these probabilities alone will drastically transform trading results, they undoubtedly may possibly modify some of your trading choices when regarded as in aggregate. Additional, this series on trend lines has been loaded with similar observations that when bundled together could, indeed, have a profound impact on how you trade trend lines.