Bulkowski's Down-Sloping Trendline Tutorial

Let's discuss trendline B. I drew it along the peaks, not cutting through price, but at the top of the peaks. The trendline touches the peaks several times, at points 4 through 8. Eventually it slices through price. Trendline A isn't nearly as good. Why not? Because it has only two touches (1, and 2). Point 3 doesn't count because it's not a minor high. Rather, the trendline cuts through price so it doesn't count as a touch. Line B is preferred, even though you'll use line A to make things a head-and-shoulders neckline.

Draw as many down-sloping trendlines as you can find. For help, click here.

You might think that drawing trendlines is arbitrary, but it need not be. Often I draw them by how well they fit price. In this example, I drew the lines A and B to form a channel. Only line A, the top one is valid. Why? Because down-sloping trendlines are drawn above the peaks, not below the valleys. When price changes trend from down to up, line B wouldn't signal a trend change, but line A would (when price crosses the trendline). Notice that C doesn't count as a touch either, because it's not a minor low. My research has proven that longer trendlines are more significant than short ones, lines with more touches are more important than trendlines with fewer touches, and touches spaced widely apart are better than trendlines with narrowly-spaced touches. Next, let's draw a trendline which shows a potential trend change.

Imagine you're looking for a trend change. How do you draw a trendline to show that? Draw the trendline that will show a trend change. The method I'm about to show you will allow everyone to draw the same line, if they know the technique.

This chart shows the answer. Why this line and not another? Victor Sperandeo provided the answer using what I call his 1-2-3 trend change method. Next slide.

Start with the highest peak on the chart. That's point A. Draw a line down connecting the lowest low after the highest high. The lowest low AFTER the highest high is point B. I show that as the lowest blue line. Swing line AB upward so that the line does not cross prices until after the lowest low. Line AC doesn't do it because the line slices through price before B. AD has the same problem (it gets hung up at F). Only line AFE works. Yes, the line does cut through price but only after B. In short, draw a down-sloping trendline from the highest high on the chart to the lowest (the lowest low must be after the highest high) so that the line does not cut through price until after the lowest low. At another time, I'll discuss how to use a properly drawn trendline to show a trend change. You can find a slider tutorial on the 1-2-3 trend change method here.