Why it’s very dangerous to trade using trendlines

trendlines

Do you use trendlines?

I dont… and I dont use them for a simple reason: subjectivity.

Look, trading forex or stocks or any other market has certain degree of subjectivity. But it doesn’t mean that we should use all kind of subjective stuff.

According to wikipedia, subjectivity is a term used to refer to the condition of being subject and the subject’s perspective, experiences, feelings, beliefs, and desires.

And when you think about it, that’s exactly what we get when we use trendlines.

We always tend to draw them at a level that confirm our biases. Let me show you.

We use trendlines to confirm our biases

Let me show you one chart:

Trendline 1

You think that the green trendline will hold the market from reaching lower levels. You feel confident about it and cant wait to see the market react to it…

But then…

Trendline 2

The market never reaches that level… so you miss that opportunity. But you update your trendline, to the orange one.

Now you are pretty confident about it and you start to see that market reacting to that level…

But then… the market breaks through that level.

Trendline 3

And you draw again your new level, the red one. Now you are confident about this one, but the truth is that it is no different from the first one.

You are using them to confirm your bias to go long.

What do you think?

Here are two more reasons to stop using them:

  • When you project little differences in your trendlines into the future, those difference become pretty large… (see the right end of each trendline)
  • We use trendlines under the hypothesis that the demand for any instrument is increasing or decreasing… but is it really?

For all these reasons I only use classic support and resistance levels…

Your turn

What do you think about this?

Do you agree with me… or you think I’ve gone completely crazy?

Let me know in the comment section.

Tags: ,


Raul Lopez

I’ve been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .


  • Art Baker

    I looked at the above trend lines your have drawn and everyone is drawn incorrectly, in fact the worst trend lines I have ever seen. I live by trend lines very easy to predict.

  • Carlos

    I think coz u dont know how to trade it. Lets use your own picture, it was why I enter the site, its a very clear example. If we watch carefully the whole of the red trendlines doesn’t have the proper algorithm while the green one has it. The other pics have not a trend line drawn, they have some lines, but not trend lines. I use very short trend lines, so short that I don’t need to draw it, but I only can say you that the most perfect trading is considering the trend lines, they enclose the essentials with amazing simplicity about this job. Regards Raul, I not always write but always follow you

  • Chad Hogan

    Drakfx,

    Ok Yes understood. I don’t use indicators either. I do have trendlines on my chart but I’ve never actually used them to take trades. Your set ups make sense. I’ll definately have a look.
    Cheers
    Chad

  • Chad Hogan

    So drakfx, you disagree that trendlines on a larger timeframe are no more reliable than a trendline on an an hourly chart? I do understand that a few touches are required to verify their importance. I also understand on an hourly chart that longer term trendlines usually don’t touch price as you’ve suggested. Most of what you’ve said is common knowledge and can be learnt off babypips. Large bank you say. I highly doubt it.

    • drakfx

      Chad trendlines are reliable and work on all timeframes , obviously larger timeframes have less noise. Well Im not disputing its common knowledge. The fact of the matter is its so simple and yet people want to fill their charts with bullshit indicators.

  • drakfx

    Disagree with you. You have gone completely crazy. Trendlines are non lagging. They project where future price may either bounce or break through. Of course they are not always going to get right on the line. Also the trendline needs to be 3 touch with decent gaps between touches ( Touches means around 12 pips away on say a hourly charts that spans 2 plus weeks ) They offer the best risk to reward because if it breaks below by 12-15 pips then stop out ( assuming a continuation trade ). Coming from trading at a large bank this is how we trade

    • Raul Lopez

      Hello Drakfx,

      Thank you for your feedback!

      I dont use trendlines, I dont suggest anyone to use them because of the reasons explained above… I use classic S&R levels, because has actually being rejected from those levels…

      But if you use them profitably, then just keep using them… like they say, dont try to fix what is not broken…

      This is just my point of view and in no way I think its the only way to look at trendlines!

      Have a great weekend pal!

      • drakfx

        Hi Raul

        I also use classic S & R. When they line up with a trendline it has even more confluence. Both work. Though I find horizontal S & R more bouncy
        ( Like a trampoline ) so its more of a zone area that could be anywhere between 0-150 pips at times. So in this instance as you state in your course candle identification is important. Diagonal lines are less bouncy (structurally not as strong ) . However its a much more confined zone area . As such the point I’m making is you can be wrong and stop out quickly. But if structure holds the risk compared to the reward is very small.

        Adios. Have a great weekend also.

        • Raul Lopez

          Thanks again for your contributions…

          Yep, I agree with you, long term S&R levels are more like zones, sometimes more than 150 pip zone, sometimes less than that… it’s all up to the market…

          And that’s basically what we do here, we always try to adapt based on what the market is doing, y use S&R levels to determine what the market is going to do… then we just look for our entry on the short term charts…

  • Chad Hogan

    I do use trendlines but only on larger timeframes. I think horizontal support and resistance is much more reliable. I have had that exact scenario happen to me though. I think I’ll dump the trendlines from now on.! Thanks Raul

    • Raul Lopez

      That would be a good idea…

      Look, it’s not that they dont work… it’s just that trendlines add certain level of subjectivity that I’m not comfortable using them…

      When you start moving them around, making them “fit” the market it’s a sign that we are using them to confirm our bias…

      Cheers,

      • Angel Tee

        When trendline is drawn whether as slope or horizontal, the support or resistance “point” is not exactly a point. It represents a zone, that is why we can keep on drawing and re-drawing any line until it matches the true picture in the chart.

        Raul, “Regression” popped out in my mind, when I re-read your blog post. And of course, it won’t work in the real trading world.

        • Raul Lopez

          You are right Angel, when you draw a trendline whether it has a slope or not we are actually talking about zones.

          The thing is that with classic S&R level, the zone is always the same… but with trendlines (with slope) those little changes at the beginning are huge at the end of the trendline…

          You are right… linear regression wont work in the real trading world… no “type” of regression work in the real world… tell me about this, as an economist I use to make a regression for everything… hehe

          Cheers Angel, and as always… thank you for your thoughtful comments

      • drakfx

        Subjectivity…lol , and what gives certainty ? Moving averages , bollinger bands , rsi ..bla bla bla

        • Raul Lopez

          Nah, I dont use technical indicators…

    • drakfx

      bad mistake…kiss those profits away

  • MOHD

    Raul…. your trading style very simple and effective….thanks ur article

    • Raul Lopez

      Hey MOHD, glad you like my approach to trade… The simpler the better!!!

      Cheers,

  • Angel Tee

    Raul, I can see that almost all geometrical chart analysis are prone to subjectivity, meaning it is not encouraged to use as trading tool, right?

    • Raul Lopez

      Hey Angel… good question…

      Look, this is just how I see it… but yes, I wouldnt trade triangles, channels with any kind of slope, or any other pattern that uses trendlines because of the reasons above…

      What’s your take?

      • Angel Tee

        Thanks for your reply, Raul.

        I like the reasons you stated. Here comes another question, system trading and discretionary trading. System trading states all rules, i.e. entry, exit, sizing, trade management etc. While discretionary trading involves some sort of trader subjectivity. Which one do you think is better?

        • Raul Lopez

          A combination of both…

          I think the way to go is to adapt to the market conditions, the market never trades in the same way, so you need to modify your strategy (TP, SL, Entry levels, etc) based on what the market is doing right now…

          So you cant trade with an automated system, because you need to adapt. But you need to have clear rules, steps that you need to follow in order to get consistent results…

          So you need some degree of discretion in order to follow and trade what the market is telling you… but you also need rules on your strategy to get consistent results…

          What do you think?

          • Angel Tee

            You are suggesting an adaptative system, which can be fully mechanical, don’t you think so?

            By the way, this may complicate the nature of your trading style, which is SIMPLE. :-)

          • Raul Lopez

            No at all…

            The idea is very simple:

            if the market is going up, you go long. If the market is going down you go short. If you have no idea, there is no trade.

            How difficult is that?

            :)

  • L3RMiNi

    Very good article!
    You always get me thinking :D

    • Raul Lopez

      That’s exactly my main goal :)

  • Dhiraj Gogoi

    Yes,you are right

    • Raul Lopez

      Hello, I’m glad you agree with me!

      Cheers,