What Are Traditional Trendlines And What Do They Represent?

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session. If you’d like to save your seat to watch and participate in the next session, register here.

Trendlines are visual representation of support and resistance in any time frame.

Pivot highs and pivot lows are key turning points in the market and are the same as swing highs or swing lows. I usually call them swings, you can call them pivots, whatever you want, but this is basically the definition of a trendline and the structure that supports it.

Trendlines naturally show a trend. If the market is going to continue its trend, the trendline should provide support or resistance. Keeping that trend going. An upward sloping trendline can provide support for a bullish market. A downward sloping trendline can provide resistance for a bearish market.

It is key that you understand that a traditional trendline that is upward sloping will only connect swing lows and an upward sloping line that connects swing highs is not a trendline. We consider an upward sloping trend line that connects swing highs to be a channel target line.

The difference between a trendline and a target line is that the trendlines provide possible support or resistance that would enable the trend to continue. A target line, however, is just a potential target area where the current trend might be forming another swing.

A combination of trendlines and target lines form a number of traditional chart patterns like channels or flags.

What validates a traditional trendline?

Traditional trendlines require three points to become valid:

• The Initiating Point
• The Validating Point
• The Confirming Point

The more a trendline is tested and holds, the more significant it is and the higher the time frame, the more significant a trendline is.

Trendline resistance or trendline support does the same thing that any other support or resistance does. It shows you when a market held support or failed against resistance, and it shows you where you might want to put a stop above support or below resistance.

If you've held a point of a trendline and then you have a trigger of a trade down the road, you could say - this trendline held so far so I can put my stop above the trendline on a short or below the trendline on a long.

What you're trying to do is gather information, to put together a high probability trade. If you're trying to put together a 100% probability trade, I hate to say this, but you should stop trading because you're going to lose your money because they don't exist.

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