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The Validity of the Trendlines When They Become Too Long


Technical analysis rules are clear and strict, but applying them in real trading needs a lot of experience.

One of the things that makes novice traders make mistakes and lose money is the trendline.

Sometimes you see that there is a nice and clear trend with a good looking trendline. You plot it on the chart and wait for its breakout. Once you enter the market after the trendline breakout, the market goes against you and hits the stop loss.

You wonder why it happened because everything looked good and the trendline looked so valid and strong. But how come didn’t the market pay any attention to its breakout and behaved as if it didn’t exist?

One of the reasons is that when the trend and so the trendline, become too long and continued, specially when the first and the second point you use to plot the trendline are too far from each other and also from the current market price, although the trendline looks valid, the market doesn’t respect it as a strong support or resistance. Therefore, its breakout and retesting will not be valid too.

It means, the price breaks out of the line and you think the breakout you have been waiting for has finally formed, but then the price goes the other way and the broken trendline doesn’t behave as a support or resistance.

This happens a lot on the huge and liquid markets like the currency market, and it happens less frequently on the stock market. The reason is that each stock market has a special and known volume and capacity and the price moves based on the buy/sell activities between the limits ofย that volume and capacity.

But in currency market there is no special volume. Money floods in the market from unknown resources every now and then, and it can change all the parameters all of a sudden.

Therefore, when a trend becomes too long and the first and second point of a trendline are too far from the current market price, the market forgets about the trendline and its exact place because the market parameters are changed since the first and the second points have beenย formed.

GBP/CHF daily chart downtrend is an example.

You think that the market will react accurately when it reaches the downtrend resistance line?

I don’t think so. The first and the second points are too far from each other and also from the current market price. By the time that the price reaches the trendline, it will be even more away from the second point because it is currently hundreds of pips below the trendline and it has a long way to get there.

Therefore, I won’t pay any attention to this trendline and the market’s reaction to it.

Even the shorter resistance line (the dashed line) can be like that. The first and the second points are far and the market’s current price is so close to the line and it is possible that it hits the line very soon to form the third point probably or break above the line. You have to be careful and make sure that the market officially respects the line and knows it as a resistance and then a support after the breakout, otherwise the line will be invalid.

GBP/CHF Trendline

What Is the Solution?

One solution is that you don’t trade through technical analysis as long as you haven’t become experienced enough in it. It takes time to become good in technical analysis and you can’t trade through it after a few months or even years.

Although the patterns and the lines have the same names (support, resistance, triangle, wedge and…), they are different each time they form and you cannot treat all of them the same.

To reach to that level, you can trade through the easier systems like candlesticks. Although they also need experience, they are less complicated than technical analysis.

The other solution is that you don’t trade a line breakout as long as the market hasn’t proven that the line and its breakout are valid. Even in that case, a reasonable stop loss and exit strategy is always a must.

Good luck ๐Ÿ™‚

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LuckScout
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"Whether you think you can, or you think you cannot, you are right." - Henry Ford

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16 thoughts on “The Validity of the Trendlines When They Become Too Long
  1. Ben Aqiba Ben Aqiba says:

    Hello Chris,

    thank you for another great article.
    We can plotted too much lines on our charts.

    Is it every line valid, which is retested by one or more candlesticks, of course if the candlesticks failed to break above or below ?

    Thanks

  2. Hello chris

    i saw a lot of shadow BB breakout in most of CHF pair. such as CAD/CHF,and GBP/CHF does it means the CHF currency getting weaker.? USD/CHF has continuation signal with very long lower shadow, with resistance breakout in monthly chart https://www.luckscout.com/december-monthly-candlesticks-are-usually-more-important/ hmm it means we gonna riding the band probably.? hehe

    and chris may i know if you use riskier stop loss all the time.? any reasons behind it.? thank you ๐Ÿ˜€

    • LuckScout LuckScout says:

      Hi Megusta,

      No, it has nothing to do with CHF.

      I consider both the riskier and safer stop loss. I don’t trade through MT4, so that I can’t set the SL orders the way that you do it on a trading platform.

  3. Amog Mayor Amog Mayor says:

    Happy new year Chris. This is a great analysis as usual. I learned a great lesson from today’s post, because this has happened to me several times that I always wonder why and confused sometimes! But I learned something special today again as it’s always been in all your articles. I’m indebted of your appreciation for ever. Thanks and more greez to your elbow Chris.

  4. thank you for sharing your advanced expertise with us; God bless.

  5. Goran . Goran . says:

    Thank you Chris for impoving our success rate with this great article ๐Ÿ™‚
    It makes alot sense what you have shared with us and I can see on charts that same approuch can be implemented on levels as well.

    Does choppy market conditions and shorter trend lines have same approuch like too long trend lines?
    From below example I can see it have, but I just want to be shure that this is not coincidence.
    https://charts.mql5.com/13/623/audusd-m-d1-fxpro-financial-services.png

    Thank you

    • LuckScout LuckScout says:

      Goran,

      Yes. You can hardly trust the lines on the choppy markets, because they are not liquid and have no direction. Everybody wants to make the price anywhere he wants and that makes the market choppy.

  6. N A N A says:

    Thank you Chris!!

  7. Julian V Julian V says:

    Hi Chris,

    Thanks for the great article at the right time. I prefer to use trend lines and levels in support of price action / candlesticks and other factors, not just on their own.

    Do you think my support line on NZDCAD daily chart is correct? The first two points are not too far apart and the line seems to have caused the recent retracement that started on 20/12/2016. https://charts.mql5.com/13/623/nzdcad-d1-pepperstone-group-limited-7.png

    I am waiting for a break of this line to go short, because of the reversal signal on Monthly chart. https://charts.mql5.com/13/624/nzdcad-mn1-pepperstone-group-limited.png

    Do you think this is right?

    Thank you ๐Ÿ™‚

    • LuckScout LuckScout says:

      Hi Julian,

      You’re welcome.

      > Do you think my support line on NZDCAD daily chart is correct?

      Not at all. We don’t plot the support lines like that.

      > I am waiting for a break of this line…

      That line doesn’t make sense at all.

      I am not trying to offend you my friend. Hope you will excuse me.

  8. Julian V Julian V says:

    Thank you Chris for feedback. No offense taken, I’m here to learn ๐Ÿ™‚

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