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Trends and Trendlines

by

Albert Yang

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Copyright Notice

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Legal

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High Risk Investment Warning

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Trading foreign exchange carries a high level of risk, and may not
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attempt has been made to assure accuracy, we are not providing any
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Sharing this Document

A lot of work that went into putting this document together. I can't tell
you how many countless hours were spent putting together the
information. That means that this information has value, and your
friends, neighbors, and co-workers may want to share it.

The information in this document is copyrighted. I would ask that you


do not share this information with others-you purchased this book,
and you have a right to use it as you see fit. Another person who has
not purchased this book does not have that right. It is the sales of this
valuable information that makes it possible for me to continue to write
and sell ebooks at a cheap price. If enough people disregard that
simple economic fact, future ebooks will be at ridiculous prices,
assuming there are future ebooks at all.

If your friends think this information is valuable enough to ask you for
it, they should think it is valuable enough to purchase on their own.
After all, the price is low enough that just about anyone should be able
to afford it. If you can’t afford this book, you shouldn’t be trading,
simple as that!

It should go without saying that you cannot post this document or the
information it contains on any electronic bulletin board, website, ftp
site, newsgroup, discussion board, forum, bbs or any sharing items
like bittorrent, emule, edonkey etc. The only place from which this
document should be available is the website
http://www.priceactionforex.com.

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Table of Contents

Copyright Notice ......................................................................................................2


Legal.............................................................................................................................3
High Risk Investment Warning ..........................................................................4
Sharing this Document .........................................................................................8
Table of Contents.....................................................................................................9
Introduction and Forward by the Author .....................................................10
Forex .......................................................................................................................... 11
Base Theory of Price ............................................................................................12
Reading a Price Chart ..........................................................................................13
Opens and Closes..................................................................................................14
Price Fractal Theory..............................................................................................15
Slope Theory ...........................................................................................................16
Definition of a Trend.............................................................................................17
Price Trendline Definition ...................................................................................18
Obvious Trends, Trendlines for Obvious Trends ........................................34
Unanswered Questions........................................................................................37
FGA’s (Frequently Given Answers) .................................................................38
Conclusion ................................................................................................................39

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Introduction and Forward by the Author

Thank you for buying this ebook.

This is an ebook that will introduce you to trends and trendlines


unlike any other presentation before. Please do not let the terse
content fool you; you should never judge a book by its cover, nor
should you just an ebook by its byte-size. A lot can be said for brevity,
I have thought through most of this, and have distilled it down to its
fundamentals. This book will help those who are trend traders, and
every other type of trader out there.

It has been my frustration that so many books talk about “trend


trading” yet never define a trend. I liken it to the Infinity car
commercials when they first came out, they advertise a car but never
showed the car. I use to give the authors the benefit of the doubt,
perhaps they had some sort of goal, for us to understand and discover
what a “trend” is on our own. Perhaps it is the thousands of hours I
have poured over their books; or the email conversations with quite a
number of them that I have become a cynic, in deep belief that they
don’t share it because they don’t know it! Next time you meet a
trader who tells you to give them your hard earned money so they can
trade for you, ask them to define a trend, and watch them pontificate
on this and that, not giving you a straight answer because they
themselves do not know.

You might not agree with the contents of this book, but I assure
you there are very few books (as of this writing, I know of none) that
even makes a digestible attempt at not only defining a trend, but
giving you a mathematical basis in which to draw trendlines, and a
good deal of confidence in the trendline you draw. I hope you enjoy
reading this book as much as I enjoyed writing it.

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Forex

I have written this for the Forex (Foreign Exchange) market, but
the information contained herein is not exclusive to Forex.
Everything I cover in this book is applicable to every market. In fact,
I will go ahead and admit something that most of you will find
ridiculous. Because I am a 100% technical analyst, I actually don’t
care if I am trading EUR/USD, corn, gold, pork bellies, Microsoft stock,
or anything else. It is the chart that I look at, and nothing else.
Most of the time, I trade without even knowing what underlining item
I’m looking at. This reduces my bias, and makes me a 100%
technical analyst.

I have tested all of this with stocks, bonds, futures, and of course
Forex. So this is applicable to any and all underlining items. But
please understand that as with the warnings I posted above, if you
have no clue, what you are doing, then you should not be trading,
regardless of instrument. Forex offers demo accounts and I highly
recommend trading with them until such time your skills and
judgment have reached the realm of profitability.

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Base Theory of Price

Regardless if you agree with the current price or not, regardless if


you feel the market is efficient or not, the price currently is what you
can buy or sell at, take it or leave it. That means then, current price
discounts EVERYTHING. If you say your BMW is worth $60,000, but
the only price people are offering is $20,000, then the sad reality of
the fact is that your car is worth $20,000. This is what I coin “Price
Reality Theory”. This is why I personally do not believe in
fundamental analysis. Yes, the Buffetologists will not scoff at me,
and tell me how wrong I am. But when all is said and done, even
Warren Buffet, when he buys, has to buy AT CURRENT PRICE.

If you cannot accept this fact to be true, then I highly recommend


you stop reading now. Inside trading aside, this is the basis of the
rest of this book.

Assuming you can accept what I just wrote above, let’s move on
to the application of this theory.

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Reading a Price Chart

A basic price chart should then be read from right to left, not left
to right. Reading left to right gives weight and priority to the past.
Reading right to left gives priority and weight to the current price.

If that is the case, then it stands to reason that ANY indicators


based on moving average, gives weight to past prices, and simple MA
gives equal weight to past prices as does current prices, therefore,
any indicator based on MA is not a reliable source of information.

One other important part of note, in any price chart, depending on


how far we zoom in or out, we are not guaranteed how far back the
chart goes, but we are always guaranteed on a live chart, that the
current price is available.

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Opens and Closes

Given that price bars are a snapshot of a price in a block of time,


if a price bar is offset, then more than likely, the highs and lows will
remain the same; but the open and close values will change. Given
this to be true, then open and close values are untrustworthy
indicators. Given that local highest highs and local lowest lows will
probably remain the same for quite a few bars, you can then see why
Donchian created Donchian Channels. His theory and mine are the
same; that local highs and local lows will remain fairly consistent in a
given timeframe, but opens and closes will not. So therefore, open
and close values will not be used in the evaluation of price.

That said, it also proves that this theory is held by Tom Demark,
who thus created the definition of local highs and local lows. Any
offset in charting of the bars, will not alter neither DC’s nor TD’s. And
while DC’s have no lag, TD’s technically have no lag, but require 2
more bars for confirmation.

So of all the price information available to us; current price, and


previous highest high, and previous lowest low will be the only items
used in determining market trendlines.

A higher timeframe is nothing more than a bunch of bars from


lower timeframes smashed together. Therefore, the highest high
and lowest low will remain, but the opens and closes will be useless.

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Price Fractal Theory

Because price charts are fractal in nature, it stands to reason that


any definition given for slope and trend direction or trend bias, should
be relative, and not absolute. That means, any definition should be
given based on the bars available for the chart that is currently viewed,
and that the definition should change as the views are zoomed in or
zoomed out.

It is quite possible for 2 people; one to say the EURUSD is


trending up, and the 2nd person to say it is trending down, and for both
to be correct; if both are view different timeframes, or different
“zoom’ness” in terms of the chart.

This requirement might sound strange at first, but if a math model


is to follow the price only, it must then be fractal in nature also.

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Slope Theory

This is where we get into the math.

Given slope as defined by y=mx+b

Then, an upward trend HAS TO HAVE slope > 0.

Corollary:

A downward trend HAS TO HAVE slope < 0

The two statements above, HAVE TO BE TRUE by


mathematical definition.

Only 2 points are needed to determine a slope. Because we


believe that current price discounts everything, current bar’s high and
low then will always be used as one of the end points. The other
endpoint then will be the absolute high and absolute low on the chart,
thus giving us 2 points in which to base our trendline drawings.
(Remember, price is fractal, especially with respect to charts showing
past price, so the other end point will depend purely on how zoomed
in or zoomed out you are on the chart.)

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Definition of a Trend

Because a trend is defined as that which has a slope that is


non-zero; we can then write the most simple of definitions for a trend.

Uptrend ~ An uptrend is when the price makes higher highs, and


higher lows.

Downtrend ~ A downtrend is when the price makes lower highs


and lower lows.

We know this definition to be correct because without the higher


high, a slope will never be > 0, and without a lower low, we know that
a slope will never be < 0.

An uptrend then, leaves a set of higher lows in its wake,


thus giving us support lines.

A downtrend leaves us a set of lower highs in its wake,


thus giving us a resistance line.

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Price Trendline Definition

If the current price discounts everything, then it is one of the end


points.

l If a trendline is to be drawn, it is to be drawn from historical


data, to current data. This is because trend is established in
the past, and we assume is carried into the present.

l If a trendline is to be drawn, by definition of slope, an uptrend


must have one end point at the lowest low point in the graph.
Otherwise, an upward slope is impossible.

l If a trendline is to be drawn, by definition of slope, a


downtrend must have one end point at the highest high point
in the graph. Otherwise, an upward slope is impossible.

No “correct” trendline which is drawn up to the current price,


can cross a price between the two points used to draw the line.

If a price bar is already crossed by the time it gets to the current


price point, how can it then be considered a “trend”?? This is worth
reading a few times, and highlighting with a marker. This is the
mathematical crux of drawing a correct trendline.

Because a trend is defined as slope, we have to then assume that


the correct trendline is the slopeline drawn in which is defined as:

The least steep line in which links a highest high or


lowest low to the current price point, without
crossing any bars between the two points.

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More importantly, it is the line which connects the highest


high, to the current high of the current bar, and the lowest low
to the low of the current bar without bisecting any bars in
between.

Because we do not deal with opens and closes, this definition


above, yields us the same line, even if there’s a shift in time.

Given this definition then, the only correct way to draw a trendline is:

For downtrends, to take the point of highest absolute high price


on the graph, to the highest point on the current bar. If drawing such
line bisects any of the bars in between the two points, then the
contact end point (on the current price side) needs to be regressed
(moved to the left) until such time that such is false.

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Example:

Here, point A is the highest high in the graph, and B is the high of
the current price bar. The highest high in the graph is drawn to the
high of the current bar, note that it crosses through a few bars,
therefore violating the definition of a trend. We leave point A where
it is, and regress point B back to the point such that:

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Trendline A-> B does not cross through any bars. When we do this,
then the correct trendline looks like this:

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Another example. Given line C-D.

There are bars that are being bisected between line C-D, therefore, D
needs to be regressed to a low in which no bars are bisected between
line C-D.

The results look like this.

Given current price, and highest high on the chart (point A) and
lowest low on the chart (point C), these are then the ONLY correct
trendlines you can draw for this screenshot. Remember that prices
are fractal, and thus you can only talk in terms of what you see on the
chart, thus meaning that altering the zoom’ness of the chart will alter
your trading, which is true and should remain true.

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I will give more examples, and go into more details about them.

This will be the chart we will be working with in our example.

Let us first identify, the highest high, and lowest low on this chart.
I have marked them as “A” and “X” respectively.

Let us then draw a line, from A to the high of the current bar, and
a line from X to the low of the current bar. You will note that with all
my charts, there are only highs and lows, no opens and closes.

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Note that the line going from A to the high of the current bar,
bisects a few bars. Note also the line from X to the low of the current
bar, also bisects a few bars.

I have highlighted the bars which have been bisected in red


boxes.

Because this violates the definition of a trend, we will leave the


anchor point A, but move the other anchor point, from the high of the
current bar, to the highs of previous bars, until such a point, that A to
endpoint crosses no bars. I shall do this for you in successive
screenshots. While A remains the same anchor point, I will move the
other end point back, to highs of each bar, until such time, our
condition is met.

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I will zoom in on the chart for easier viewing (zoomed in portion


marked in red box)

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The original A line.

We will now move that line to the high of every bar, and we keep doing
so until such point in time that no bars are bisected by that line.

A -> High of one bar back. We still bisect lines in between.

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A-> high of 2 bars back. We still bisect bars in between.

Next, I will give you the series of progression without comments.

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Here, we have finally regressed the end point such that point A, and
our other end point do not bisect any bars in between them.

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The end point we ended up with, is marked with a red arrow.

With training, you can do this really quickly.

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I will go back to our reference chart with the A line correctly drawn,
but the X line incorrectly drawn.

I will now draw the X line correctly.

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I have marked the two anchor points which are used, with red arrows.

In this example, because the X line is “further back in time” than


the A line, X would be considered the “longer term” trend, and A would
be considered the “shorter term” or “temporary” trend. Sometimes,
A is also called the “pullback”. That means in this chart, we have an
uptrend (X line) with a downtrend pullback (A line).

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The examples I have given, should be sufficient for you to


understand how to draw a trendline, quickly, and accurately.

While I have no way of proving that these two lines are indeed
correct to the current trend, I do know that these two lines do not
violate (mathematically) what we know about trends (on the chart we
are viewing), something that cannot be said for about 95% of all
trendlines drawn on almost all charts I see.

Without falling into an obvious “Black Swan” fallacy, and


acknowledging that both are completely different, we can NEVER
know that what we have drawn is a correct trendline, but we can know
quite a lot.

We know: The highest high and lowest low on any given chart,
will always be a reference point, because of the definition of trends.

We know: Highest high and lowest low, will vary, according to


the zoom’ness of the chart, and every person’s trendline will be
altered by their chart and their timeframe and their perspective on the
chart. This is due to the fractal nature of prices.

We know: Any trendlines we draw for the current bar, will not
violate the definition of a trend, i.e. that the trend line will not have
broken previous bars.

As said from a discussion with a trader who shall remain


anonymous, when you draw a trendline extending to the current bar,
trend “virginity” should not have been breached. No lines you draw
should bisect any bars between your two contact points.

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Obvious Trends, Trendlines for Obvious Trends

What if you have an obvious trend? What is an obvious trend?


Well, an obvious trend is anytime you have the current price as either
the highest high, or the lowest low on the chart.

Example chart:

The current price IS the highest price, so the trend is UP! That was
easy!

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Now let us draw a trendline for it. Using the same principle, I
have marked the lowest low on the chart as “L”. I have drawn a
trendline such that the trendline does not violate what we know about
trends. I have marked the other endpoint used with a red arrow.

Please note that no bars are bisected between L and the red arrow.

In this case, there is only ONE trendline on this chart, because the
current price is the highest high.

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Same can be said for obvious downtrends. Current price is the


lowest low, so we have an obvious downtrend.

I have marked the anchor point as “H” (Highest High point on the
chart), and marked the other anchor point with a red arrow.

Please note that no bars are bisected between H and the red arrow.

In this case, we have again, only one trendline, because the


current price is the lowest low.

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Unanswered Questions

The unanswered question I anticipate arising:

Question: “How do you then know when a trend has been breached
if no trendlines you draw, will ever bisect a bar previous to it? The
definitions you give, seem to render trendlines fairly lobotomized.”

Answer: This I answer this in the 2nd book. In the 2nd book, I will
go into more details about trend biases and previous trend breaches.
I will also cover things like trend fans.

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FGA’s (Frequently Given Answers)

Question: “By your definition, doesn’t this mean we have to redraw


a new trendline with every new bar?”

Answer: Yes and no. This partially answers one of the previously
unanswered questions when you ask this question, if you haven’t
figured that out.. Yes, you need to reevaluate the current trend, with
every new bar. Because we regress the bars when we draw the
trendlines, it might be possible that we need not redraw the line at all,
that our old line still holds true. BUT, assuming the trend has
changed, if you never erase the previous trendlines you drew for
previous bars, you will then know when the current price breaches a
previously drawn trendline. In the 2nd book, I will give a better
definition for it how to deal with and draw breaches, and how to deal
with trend breaks.

Question: “I feel suckered. By not answering the question above,


you are trying to get me to buy your second book aren’t you?”

Answer: Did you learn something from this book? If so, how can
you be suckered? The reason I have broken this book into two parts,
is because of the anticipated length of time it will take me to generate
the 2nd half. If this book was postponed to wait for the 2nd half to be
finished before it is released, the release date would be pushed back
probably by 6 months to a year, even accounting for Hofstadter's law.
So I made the decision to break the book up, so the first parts I have
finished can be released early to help as many people as possible.

UPDATE: I have finished the 2nd book called “Trendfans and


Trendline Breaks.” It is available for purchase at
http://www.priceactionforex.com

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Conclusion

What started out as, me; being sick and tired of typing the same
thing and answer emails, has resulted in a book that explains the
basics of trends.

However, not reading the 2nd book does not preclude you from
thinking for yourself!! In fact, I HIGHLY recommend you question
everything I have written, and think for yourself. Chances are, with
some effort, you will be able to think of most of the contents from the
2nd book for yourself. I encourage you to think more.

Until we meet again, may all your trades be fruitful and profitable
ones.

“Reading, after a certain age, diverts the mind too much from its
creative pursuits. Any man who reads too much and uses his own
brain too little falls into lazy habits of thinking.” -Albert Einstein

Please frequent my website http://www.priceactionforex.com,


the 2nd volume of Trends and Trendlines, called “Trendfans and
Trendline Breaks” has been released. Also, come to the website as I
often offer free ebooks! Thank you for your time.

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