As you have seen, prices will often bounce between trendlines. Let’s look at an uptrend diagram.
As we have discussed, prices will tend to bounce back and forth between these trendlines. Many chartists believe that in order to confirm a trend reversal, the trendline must be broken three times. Look back on some of your own charts to see how uncannily accurate it is.
In John Murphy’s Book, Technical Analysis Of The Futures Market (highly recommended reading, by the way), he talks about the importance of the number three. He says that the Fan Principle has three points, major bull and bear markets go through three phases, (Dow Theory and Elliott Wave Theory), there are three types of Gaps, there are Triple Tops and Triple Bottoms, Head and Shoulders that have three main peaks, three classes of trends that we talked about earlier, three trend directions (up, down and sideways), three types of triangles, and there are three principal sources of information— price, volume, and open interest. We will discuss all of these items later in the course. I just find it very interesting and did not want to forget to mention it.
45 Degree Angles
W.D. Gann liked to use 45-degree angles with all his trendline projections. His theory was that most “true” trendlines would angle at an almost perfect 45 degrees. If the angle is greater than or less than that, then it won’t hold.
Look at the following chart to get an idea of what Mr. Gann was talking about.
So when you see a trendline that is just too slow, or too fast, don’t trust it in most cases. The trendline on the following chart was a perfect 45-degree angle and as you can see, it lasted for several months.
Remember this chart? Look at the three lines I drew on it. As you can see, all three of them were approximately a 45-degree angle and they all lasted for two to three months. Aren’t these charts interesting?
I do not personally hold much merit in this “rule” and just use my “eyeball” to see if it’s trending normally.
Learn more about David's Personal Coaching with Common Sense Commodities for leading edge information and training in commodities and options trading.
* Testimonials are not a guarantee of future success. All information is for educational use only and is not investment advice. Trading financial instruments, including Stocks, Futures, Forex or Options on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in any of these financial instruments you should carefully consider your investment objectives, level of experience, and risk appetite. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. The possibility exists that you could sustain losses exceeding your initial investment. You should be aware of all the risks associated with trading and seek advice from an independent financial adviser if you have any doubts. Past performance, whether actual or hypothetical, is not necessarily indicative of future results. All depictions of trades whether by video or image are for illustrative purposes only and not a recommendation to buy or sell any particular financial instrument and do not factor in trading costs in trading examples due to varying commission and fees among traders. The impact on market prices due to seasonal, market cycles or news events may already be reflected in the price. See full risk disclosure. See full risk disclosure.
Copyright © 2017 Common Sense Commodities. All Rights Reserved. | Powered by Nickel SEO