Redrawing Trendlines

Redrawing Trendlines

Sometimes “Old Man Trend” will try and fool you. Let’s use some common sense and see if we can stay on track. In the following diagram, in Example One, you will notice that the prices hit the trendline three times, and then it suddenly broke out of the trend one day (point #4 in Example One). What do you do? Is the trend broken? Do you redraw the trendline? The following diagram may help in your decision-making process.


The way that I suggest is to wait until the fourth or fifth “hit.” In Example Two below, the next hit would confirm that the trendline should be raised, and connected between points 1, 4, and 5. It would have been a breakout of the trendline shown for example one though. But the “new” trend is still down.


On the other hand, if the price did not rise (Example Three), then I would continue the trendline as it was in Example One and would consider point #4 where it broke out of the trend as a false breakout. I have a saying that when this happens it’s because the camel stuck his nose under the tent, didn’t like what he saw, and left. Yes, it’s corny but it sticks in your head doesn’t it?

How to Tell If the Trend Is Actually Broken


There is no absolute way to be 100 percent sure except to just wait and see. One way that might help is to watch the closing price each day. If the closing price is beyond the trendline for two or more days, then it is a good chance the trend is broken (reversed).


You should usually not trade the first day the price breaks the trendline. It’s best to wait at least two days to confirm the trend is broken. Look at the following diagram to see what I mean.


In the above diagram, the top example shows you that the trend is still intact since the price did not close below the trendline for two consecutive days. The bottom example shows the trend being broken since the price did close below the trendline for two consecutive days. Hopefully, this will keep you out of some bad trendline breakouts. Sometimes the third day is the one that tells the true story.