Chapter 2 Drawing Trend Lines
1. You need a minimum of two touches to draw a trend line, but do not trade it until the outcome of the third touch becomes clear.
2. Begin on the higher time frames, connecting swing lows to swing lows and swing highs to swing highs. A trend line that is many weeks or days old is important, a trend line of a few minutes or hours is worthless, unless it is a crucial piece of a bigger technical picture.
3. If the price has seriously violated the trend line since the minimum of two touches was made, it is no longer a valid trend line – so only draw what has not been invalidated by more recent price history.
4. The more symmetrical the price movements in both time and price that are being connected, the more objective the trend line is likely to be.
5. The steeper the trend line, the lower quality it is likely to be. Conversely, the gentler the angle of the slope, the more effective it is likely to be.
6. When you have identified where a good trend line can be drawn, drop down to the lowest time frame possible to draw the line, and be extremely exact. A trend line should connect the extremes of the points as exactly as possible on as many of the points as possible. This means that if for example there are three touches, but the third touch moves a little too far, the line should be drawn to exactly touch the extremes of the first two points, but to also allow the overshoot of the third touch. Don’t try to “average” between the touches.
7. When a trend line has not been touched for a much longer period than the longest period between any two previous touches, it has probably lost any significance.
8. If a trend line is hit and can be subsequently readjusted to better fit its touches, do not hesitate to readjust and redraw the trend line.
9. If a parallel trend line can be drawn either above or below a trend line at a similar ascending or descending angle, it is probably going to be an effective trend line, so draw it. You now have a price channel, and if you are trading with the trend, you will have an obvious place both to exit and to enter! See the example of a channel below:
