Why it’s very dangerous to trade using 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:
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…
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.
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…
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.