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Looking at Lines, Part 1
Many eSignal subscribers use our built-in drawing features everyday for defining trend development, identifying trading patterns and monitoring break-outs. Chief among their tools is the trend line. It comes in various forms, and we’ll take a look at each style within this article. We’ll also look at common uses for these trend lines, and even dig a little deeper into the line tools by looking at two of the line studies: The Regression Trend Channel and the Pitchfork.
Working with the Line Toolbar
Before we get started on the tools, let’s begin with the tool-box; that is to say, the Line Toolbar. For Part 1 of this two-part series, we’re going to take a look at the first nine icons on the bar, so the image shown subsequently is roughly half of the current Line Toolbar.
Figure 1: The Line Toolbar (Part 1)
The Line Toolbar, as with most toolbars in eSignal, is quite straightforward to use. You simply click on the icon you wish to use and, then, apply the line to the chart with a few clicks. However, the Line Toolbar has a second functionality that you may not be aware of. You can right click an icon to define the default settings or action. For instance, right clicking on the Segment icon brings up the dialog box (shown subsequently), where you can change the default color, size and Price Ruler settings.
Figure 2: Trend Line Defaults
Using Trend Lines
The first icon on the Line Toolbar is the Pointer. Selecting it simply restores the mouse pointer to its normal function. The second icon is fairly complex, and we’ll cover it shortly.
The third, the Segment line, is the most basic of the trend lines because it is simply a line drawn between two end-points. It is most often used in the application of traditional trend line theory, such as defining support or resistance levels along a series of highs or lows. It can also visually assist the eSignal user by calling attention to price patterns, such as triangles, wedges, flags and the like. One other use for this tool is as a swing measurement tool using the Price Ruler option in order to call out the exact price movement for each defined trend.
Figure 3: Segment Lines with Price Ruler
The fourth icon is the Ray. The way you use it is similar to the way a Segment Line is drawn, but, instead of having two end-points, it has only one. When you are drawing a Ray, once you establish the first anchor, the line will extend through the second anchor point and then continue infinitely in that same direction. This is most useful when you have a major high or low pivot and, then, want to line up possible trend lines from that vantage point.
You can use the Extended line tool in very much the same way as the Ray tool. The only difference is that there are no end points with this drawing style. That is to say that the line is extended across the entire length of the chart as defined by the two anchor points.
The Vertical line tool is often used to place timing marks at changes in trend. This is helpful when you are zooming out to see the larger picture and the subsequent time patterns that can occur.
The Horizontal line tool is commonly used to define long-term support and resistance price levels that have occurred or are expected to repeat over an extended period.
Let’s now head back to the Line tool, which is the second icon on the toolbar. This tool that looks like a pencil allows the user to select the type of functionality it should represent via the right-click menu. In other words, this icon can represent any of six different types of lines, including the 5 main trend line types we covered earlier and also a new line type… the Arrow. I personally have this icon set to the Arrow tool most of the time, so I can point out specific characteristics of a chart that I need to pay attention to or that I want to show to a client or colleague.
Take, for instance, this chart on the Dow 30. The most recent price action has created a “double-top”, a price resistance level formed by two pivot highs. It is visually represented here by the use of the horizontal line and is called out by the arrow and text tools (the latter will be covered in Part 2).
Figure 4: The Arrow Tool and Trend Lines
Regression Trend Channel
This drawing tool is based on statistics to develop a three-line channel. The least-squares method of linear regression is used for the basis line while the outside lines are based on the number of standard deviations from that middle point. Based on the bell curve theory, under normal distribution of random numbers, 68 percent of values fit within one standard deviation of the mean, and approximately 95 percent fit within two deviations.
Knowing this, you realize that the breaking of a Regression Trend Channel using a standard deviation of two is significant when the channel is set up against a trend.
To apply this line tool to a given trend, first, click on the bar where the trend started and then click on the highest point achieved thus far in the trend (or the lowest point for a down trend). When a break occurs against the direction of the channel, a trend change is likely in process. If a new high is made before the breakout occurs, simply redraw the channel to the new high; the same is true if a new low is created for a down-trending Regression Trend Channel.
Pitchfork
The pitchfork tool is most often used to define support and resistance lines. It can also be used for trend monitoring in a similar manner to how the Regression Trend Channel is used. The pitchfork is built by defining three points: Two of which are the high and low of a given trend and the third being a correction against that trend.
Figure 5: Pitchforks Applied to the S&P 500
In Figure 5, the pitchfork was formed by the clicks marked as 1, 2 and 3. This made for a great resistance point at A. For the next two months, the prices then came back to normal by adhering to the middle line while the bottom tang of the fork remained as a loose support level.
This became especially important at point B, where the prices held support for two weeks until finally breaking at C. Even after the prices were able to puncture that pitchfork angle, the bottom line remained a resistance level (support becomes resistance after a break).
It even appears that, since the beginning of June, a new pitchfork is forming, and the top fork tang is creating a great ceiling for the correction that is in process.
I hope you enjoyed taking an in-depth look at the eSignal Line tools. In our next segment, we’ll dig into Fibonacci and the eSignal notation tool.
