Trading with TrendLine Dynamics Charts

Where to Begin

If you want to have better performance than the crowd, you must do things differently from the crowd.
— Lauren Templeton

In the previous article, "Getting Started in Trading", we talked about the objectives and pitfalls of trading. In this follow-on article we will talk about how to use the TrendLineDynamics charts to find and evaluate high probability entry opportunities. We will also discuss details of trading, such as position sizing and making exit decisions. Lets start by talking about the information on the web site and what it will (and will not) do for you.

Popular Indicators - Do They Work?

Before I figured out how to get the computer to identify trendlines, I spent more than a decade testing one popular market indicator after another. I would program an indicator and then test it. The testing program would start with a hypothetical trading balance of $50,000 and then run the indicator over a decade of data for each of several hundred stocks. When the indicator signaled a buy, the program would allocate $1,000 to the trade. When the indicator signaled an exit, the program would calculate the gain or loss and adjust the trading balance accordingly.

What I found was that in the long run, almost all the popular technical analysis indicators did not work. Most would make nice profits when the market trend was up or down, then they would give all of it (and more) back when the market trend was horizontal. In case you haven't checked it, most stocks trend horizontally most of the time.

After all that testing, I went back to drawing trendlines on charts by hand and trying to figure out how to automate the process. A couple of years later on I ran across this in an article by Dr. Gary Hirst:

I had heard about technical analysis and chart patterns, and looking at this stuff I would say, what kind of voodoo is this? I was very, very skeptical that technical analysis had value. So I used the computers to check it out, and what I learned was that there was, in fact, no useful reality there. Statistically and mathematically all these tools -- stochastics, RSI, chart patterns, Elliot Wave, and so on -- just don't work. If you code any of these rigorously into a computer and test them they produce no statistical basis for making money; they're just wishful thinking.

But I did find one thing that worked. In fact almost all technical analysis can be reduced to this one thing, though most people don't realize it: the distributions of returns are not normal; they are skewed and have "fat tails." In other words, markets do produce profitable trends. Sure, I found things that work over the short term, systems that work for five or ten years but then fail miserably. Everything you made, you gave back. Over the long term, trends are where the money is.

Dr. Hirst's research confirmed what I had seen, but I had many friends who were successful technical traders and I asked them about how they did it. Each one seemed to have a couple of favorite indicators, and they were all indicators that I had tested and rejected. After much thought , it finally occurred to me that it wasn't the indicators. It was what each individual saw when they looked at the indicators. Each trader had settled on a few indicators that spoke to them. It wasn't just the indicator. It was what the indicator triggered in their minds that allowed them to understand what was going on in the market.

Since none of the technical indicators I had found were speaking to me, I went back to drawing trendlines by hand and trying to figure out how I could get the computer to draw them for me. I also put in a significant amount of effort on getting rid of useless views and attitudes and learning new, productive ways of thinking and behaving.

The Power Of The Human Computer

The most powerful computer in the world lies between your ears, but if you want to become a successful trader, you are going to have to do two things. First, you are going to have to get your internal computer under control. In spite of its intellectual powers, it can be thwarted by urges and emotions that will cause you to make bad choices from time to time. Many new traders have beliefs or desires that will prevent them from being successful. For example, some beginners get into trading because they believe that trading is exciting.

The reality is that trading can be exciting or it can be profitable, but it is seldom both. You are competing against the best and brightest in the world. They are educated, have the best computers money can buy, and they have deep pockets. If you want to beat these people and make money, you have to be calm, objective, and well disciplined.

The second thing you have to do is find a trading system that suits you. This can be a difficult task. Most novice traders don't have clear cut goals or objectives. Finding a system that suits you was discussed in some detail in the previous article, "Getting Started in Trading". If you haven't read that article, you might consider reading that before proceeding with this one.

In the course of this series, I will describe what our system is based on and how it works. Once you understand how the signals work, then maybe you will find that our system is a good fit for you.

If this method does not fit your needs or it does not suit your personality, then you need to keep looking. (My business-partner does not like this part and wants me to leave it out, but I am not going to try to talk you into something that ultimately will not work for you.)

Once you have read this series, if you think, "Wow! That really makes sense to me. I can do that!" then that's great. Happy to have you with us. If not, check out some of the books I listed in "Getting Started In Trading" and see if there is something in those that resonates with you.

Continue to the next article in the series: Objectives