How to draw trendlines methodically

9th May 2016, 02:00 PM

You are probably aware that there are multiple ways to draw trendlines, the one at Set
and Forget is just one of many methodologies to draw them. Drawing trendlines is not
and should not be an art. Obviously it takes a while to master this any methodology. It
would be an art if everyone had their own unique way of drawing trendlines or you
didn't have strict rules on how to draw them. There is no perfect way to draw
trendlines and it seems that no one out there can agree on the best way to draw them,
but here at Set and Forget we do have very specific rules draw them methodically and
mechanically.

Any rules set should be as methodical and mechanical as possible, rules should also
be objective, that is, anyone out there having learnt the same rules should be able to
draw them the same way. This does not happen always, why? Because trendlines
connects swing lows and swing highs as well as pauses in the markets, these swings
are made of price action like any other pattern. Why am I saying this? If you are not
good at reading price action, you will probably start thinking that trendlines can be
drawn in different ways, but it is not the case. There are scenarios where drawing
trendlines will be very difficult due to lack of clear impulses, compressed price action
or even swing lows (valleys) that also look like a pause (CP). There is a full lesson on
how to distinguish this 'hybrid' price action (read the lesson here it contains some
hours of videos).

However, if you are just starting or coming from other strategies, you will probably
struggle with drawing trendlines. The obvious trendlines are just obvious, but
sometimes they are not so obvious because the swings that the trendline need to
connect are made of unclear price action that could become much clearer if you read
price action slowly, if you read every single candle that makes the swing you want to
connect the trendline with. You must speak out loud and read every candlestick in
order to get the right answer, otherwise you will probably be making quite a few
mistakes. Read each and every candle out loud like "rally, base, drop, base, rally...." if
you happen to find an area where candlesticks are not that clear, you might have
found one of those unclear scenarios mentioned above. Skip or ignore that, ask other
senior members for advice on how to read it. You are part of a community, make use
of it and ask please.

Reading price action is key to understanding supply and demand and drawing
trendlines. It takes time and some skills to make reading price action second nature.
Do not despair, it's just the way it is in any field of life.
WHAT IS THE PURPOSE OF DRAWING TRENDLINES?
1. Identifying potential reversals. We don't need an opposing zone eliminated in
order to draw a trendline, trendlines can also be used as confluences. If an
opposing zone is eliminated then we'll have the trendline will have helped us to
identify a new trend as explained in the Trend lesson
2. Connecting the last two bullish or bearish impulses on every timeframe of
our sequence
3. Learning as soon as possible when opposing impulses are being created on
timeframe X, if that happens we must lean on timeframes higher than the one
where we start seeing opposing impulses. If the trend is down and bearish
impulses are being created, what would you think if the next impulse is bullish
and stronger than the last bearish impulse? Wouldn't you think the market
dynamics for that timeframe are changing? Exactly. That's the reason why the
trendlines are drawn like this and why we use a sequence of three timeframes
and the realignment concept (you will learn about these concepts later in further
lessons)
4. The break of a trendline with a full OHCL will create a potential
imbalance. Read more about it on the lesson on how an imbalance is created
5. Using trendlines in combination with multiple timeframe analysis and the
sequence can give you the exact point where a new trade setup can occur.
6. Trendlines can signal the the continuation of a trend if respected, or a reversal
or a bigger pullback to bigger timeframes if broken
We'll need at least two touches of the trend line connecting the latest two obvious
valleys and peaks (swing lows and swing highs), the more touches the TL has the
more structured, mature and powerful the trendline and trend will be.

The attachments below explain a methodical and objective rules set that will allow
any trader to draw trendlines the same way. By doing so we'll all be looking a the
charts with the same eyes and drawing the same trendlines.

Examples below describe how to draw bullish trendlines, the exact opposite
would also apply to bearish trendlines. These rules have been tested over a long
period of time and account for hundreds if not thousands of hours of back test and
forward test, I did not come up with them because I thought it was a nice way of
drawing trendlines or I was bored
RULES TO DRAW A BULLISH TRENDLINE CONNECTING THE LAST
TWO VALLEYS
• Always connect the latest two valleys to draw a bullish trendline
• There is no criteria for a "1st peak" other than meeting the definition of a peak.
A bullish trendline isn't a trendline just because two valleys are present. The
second valley's high must be higher than the first valley's high and the first
valley's low must always be lower than the second valley's low forming a W
tilted to the left
• Second valley’s second leg (impulse 2) has to make a higher than first valley’s
second leg at P1.
• Once price makes a higher high than P1, Valley #2 will be confirmed.
• Draw a bullish trendline by connecting last valley (V2), go down and left and
connect it with previous Valley at V1.
• Valley 2 should never make a lower low than Valley #1. Valley #3 should
never make a lower low than Valley #2
• If price makes a new new Valley, we’ll need to adjust the trendline and connect
Valley #2 and #3, we must always update trendlines and connect the latest two
valleys.
CONTINUATION PATTERNS (CP) CAN’T BE USED TO CONNECT A
TRENDLINE. OVER-EXTENSION
• Continuation Patterns (CPs) won’t be used to connect trendlines. We will only
use valleys and peaks.
• It’s possible to see CPs before a new valley is printed (CP1). They will be
irrelevant to drawing trendlines since we are not allowed to use them to connect
trendlines.
• We’ll only use CPs to draw a more aggressive trendline when 3 or more
consecutive CPs have been created (CP 2, 3 and 4) creating over-extension

WHEN OVER-EXTENSION IS RESETTED

• If price has been printing 3 or more consecutive CPs, we’ll consider that
timeframe as over-extended
• If after a series of consecutive CPs price creates a new valley, over-extension
will be resetted and we’ll be allowed to draw a new trendline connecting latest
two original valley V2 and the new valley resetting over-extension (V3)
AUDUSD D1 OVER-EXTENSION RESET
Find below an example for an over-extension reset.
• Aggressive trendline in red could be drawn after three consecutive CPs.
• Over-extension is resetted when there is a new valley, the reset happened at the
new D1 valley at #4. The valid trendline is now the blue one.
The video below shows step by step how to draw and use trendlines to assess trade
direction with supply and demand levels.

There are many different ways to draw a trendline, far too many I would say and they
are all probably good for those who have mastered those methods. However if you ask
any two traders to draw a trendline, you will probably see them drawing trendlines
very differently.

We can’t lean on subjectivity in our trading plan because it’s all about capital
preservation, we can’t depend on subjectivity to risk our hard earned money.

HOW TO DRAW A TRENDLINE?

• Connect the latest two obvious valleys (swing lows) and peaks (swing highs).
These valleys and peaks must be clear and obvious, it they are not, consider
them as pauses. If they are not clear, basing should be unclear and poor and
 removal would be expected anyway. As you gain more experience reading
price action, you will see valleys and peaks that you could not see before
• Update the trendline every time there is a new valley or peak
• Each timeframe has its own trendline independent from other timeframes and
this is where subjectivity comes in in other methodologies
• Continuation Patterns (CPs) will not be used to connect trendlines unless
there are 3 or more (over-extension)
• Never ever cut through candles. That is, the trendlines cannot go through
wicks or candlestick bodies, you must connect the latest peaks and/or valleys
meticulously making sure you are not cutting through the candles, neither
wicks nor candlestick bodies
HOW TO DRAW A BULLISH TRENDLINE?
• Locate current price and the highest high closest to current price
• Move down and left and locate the last clear valley. That will be our first valley
• Continue to move down and left, and stop when you see another valley lower
than previous valley, that will be our second valley
• Connect the two valleys with a bullish trendline
• Update the trendline every time there is a new valley whose second leg out
makes a higher high than the upper valley’s second leg high
HOW TO DRAW A BEARISH TRENDLINE?
• Locate current price and the lowest low closest to current price
• Move up and left and locate the last clear peak. That will be our first peak
• Continue to move up and stop when you see another peak higher than previous
peak, that will be our second peak
• Connect the two peaks with a bearish trendline
• Update the trendline every time there is a new peak whose second leg out
makes a lower low than the upper peaks ’s second leg low
WATCH VIDEO BELOW

17th January 2017, 10:01 AM

EXAMPLES ON HOW TO DRAW TRENDLINES

We must connect the last obvious valleys and peaks. How do obvious ones look like?
Obvious ones are obvious As simple as that. If it's not obvious then consider it a
pause.

Let's draw step by step trendlines connecting the latest two valleys and peaks using
AUDUSD weekly chart as an example. After applying the rules by connecting the
latest two obvious valleys and peaks, the AUDUSD W chart ends up like this.

STEP 1:
• #1 and #2 are connected by a bearish W trendline, the break of this TL creates
demand at #4
• Green trendline cannot be drawn because peak #2 cannot be connected with
peak #5. Why? #5 didn't make a lower low than the lowest low made by peak
#2

STEP 2:
 • Peaks #1 and #2 are connected by a bearish W trendline, each peak is made of a
bearish engulfing pattern. The break of this TL creates demand at #3.
• #4 is the long entry at the retest of new W DZ.

STEP 3:
• Valleys #1 and #2 are connected by a bullish W trendline, each valley is made
of a bullish engulfing pattern. The break of this TL creates supply at #3.
• Supply at #3 is a fresh level, price had never retested it, whereas demand at #1
is considered to be tested.
STEP 4:
• Peaks #1 and #2 are connected by a bearish W trendline. The break of this
bearish TL creates W demand at #3.
• Both W SZ at #1 and W DZ at #3 are fresh since price has never retested those
imbalances.
AUDUSD WEEKLY CHART -- END RESULT --
After connecting the last two obvious valleys and peaks on AUDUSD weekly chart,
we end up with 3 demand levels at #1, #2 and #4, and one supply level at #3