I've been writing some about trend lines lately and noted my observation, in many of the articles, of the declining use of this important charting tool. I do not have any illusions that a couple of articles by a fairly unknown author will have any impact on the use of these lines but if just a couple of traders see the worth of trending lines and e-mini trading, then I suppose I have carried out my job.
Trend Angle
You would consider that a sharp e-mini trend angle (one extra than 60 degrees) would result in a longer sustained e-mini trend, on to begin with consideration. But a few authors (Bulkowski and Murphy) along with some less comprehensive back testing on my component, has shown that sharp trend angles commonly result in substantially shorter trends. (and hence, less profit) I thought about this some, and the result makes sense in that a large number of traders are required to simultaneously trade in the same direction in order for the trend to continue at a sharp angle if we set aside the occasional low volume rally, a tremendous amount of trading to a single side of the marketplace 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 most likely? Not definitely, as the sharp trend level continues there would be a considerable number of traders who would determine the market has covered a important quantity of actual estate and look to take earnings, when others would make a decision (at some value level) that the market place has reached overbought or oversold levels and appear to trade in the opposite direction. Sharp angle trends tend to be considerably even more short-lived than their flatter angled e-mini trends. The top trends turn out to be trends in the 30-40% range.
Length and Touches
The length of a trend relative to performance turns out to be less of a surprise. Extended lines tend to carry out far better than brief trend lines. With no heavy shopping for or selling pressure (based upon whether or not the trend line is moving up or down) the market place can retain a fairly continuous level of getting or selling in the very same path. This level of "asymmetrical equilibrium" (a term of my own invention) is significantly more sustainable and outcomes 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 real surprise in this observation, but how a great number of individuals genuinely take the time to contemplate trend line length and how it could possibly have an effect on potential profitability?
When discussing help and resistance (SAR) it has been discovered that the more touches and subsequent price rejection along the SAR, the extra robust the line becomes. Once more, it should really come as no surprise that the very same relationship holds correct for trends. At the beginning of my trading career, in the early '80's, the "old-timers" insisted that the extra touches along a trend would result in a trend line that was a lot more robust. I just accepted it as a truth, and it turns out that the alot more peak or valley "touches" along a trend line that result in value rejection, the higher the possible profit in the trend line. Conversely, trend lines with much less than 3 touches had a higher probability of getting breached. (Bulkowski and Farmer) I suppose typical logic would dictate the truth of this assumption, as way more successful tests of a trend line that result in price rejection creates, at the particularly least, a psychological image in traders' minds that the line will prove, in the extended run, to be a challenging activity to breach.
In summary, I have stated that sharp angle trend lines tend to be less profitable that gradual sloping trend lines. Additional, I have stated that longer trend lines with a lot more touches resulting in cost rejection tend to be a lot more robust than less touched trend lines. Though neither of these probabilities alone will drastically transform trading results, they definitely may perhaps transform some of your trading choices when deemed in aggregate. Additional, this series on trend lines has been loaded with comparable observations that when bundled together could, indeed, have a profound effect on how you trade trend lines.