A good start is half the battle

Apurva Sheth
These are lines from famous Greek philosopher Aristotle. This proverb was spoken hundreds of years back but is still relevant and important today. The mistake lies in the beginning, so an error at the beginning, though quite small, bears the same ratio to the errors in the other parts.

Making a good beginning is important no matter what you are attempting: a new business, a new job, a new home. If you get off on the wrong foot it can take a very long time to get back on track. Making a good beginning gives you an edge, a confidence boost; it bodes well for the rest of your venture.

Lord Ganesha is considered as the god of beginnings, the remover of obstacles. Traditionally, we have always given prime importance to good beginnings which is why he is prayed across cultures and religions throughout the length and breadth of India.

The reason why I am emphasizing so much on good beginnings is that even in technicals good beginnings are equally important. Most of the times I see people who have just started with technicals will start drawing random lines on charts. These are known as Trendlines.

A series of ascending bottoms in a rising market can be joined together by a straight line. These are uptrend lines. And so can the tops of a descending series of rally peaks. These are downtrend lines.

Up & Down Trendlines
Source: Profit Hunter

However, 99% of People Get This Wrong. Most newbie technicians begin by drawing trendlines randomly on a chart and ultimately end up with wrong interpretations. If you remember lessons from your geometry class, we need two points to draw a line. Same rule applies while drawing trendlines. I often see people randomly drawing line that touches only one point. Then there are a few other who use two points to draw a trendline. This method of drawing a trendline is correct but their interpretation out of this isn't as correct.

The general rule that I follow is that after drawing trendlines from two points the trendline should touch and bounce back from a third point to be considered valid. This is a mistake which even seasoned market veterans do when using technical analysis. They would rarely check the validity of the trendline that they have drawn and expect the price to bounce off from the third point itself. It may very well do so but expecting it always isn't correct. The probability of price bouncing back from fourth or fifth point is higher than a trendline which is just drawn with two points. So the more the number of bottoms (uptrend) and tops (downtrend) formed near a trendline the more important a trendline becomes.

Nifty Intraday 25 min Chart showing valid & invalid trendlines
Source: Spider Software India

In the chart illustrated above I have drawn an uptrend line from the low of 31st October 2014 to the low of 20th November 2014. The trendline is drawn correctly with two points but its validity is not confirmed until it touches a third point and bounces from there. So one should wait for the price action to unfold itself instead of anticipating a bounce back when price starts trading closer to this trendline. Prices could have bounced up again from this trendline however we would banking more on chance than on probabilities.

On the contrary have a look at down trendline that I have drawn from 5th December 2014 to 11th December 2014. I would consider this as much more valid than the earlier one. Third point touched this trendline on 12th December 2014 and confirmed the validity. After this point we can look up to this trendline for valid signals. That's exactly what it gave on 15th December 2014 as index reversed twice after touching this trendline and resumed its downtrend. Eventually even this trendline was broken as index rallied above it however it did its job and gave a correct signal.

Apart from this there are a few other concepts which I apply to judge the validity of a trendline. If a trendline is held for a longer time without being penetrated by prices its significance/validity increases. In the chart attached below I have drawn a down trendline from August 2008 peak to October 2009 peak on DLF. It's been more than 6 years and this trendline is still valid.

Down Trendline drawn on DLF weekly chart since August 2008
Source: Spider Software India

Another important factor is that the angle of ascent should not be too steep. Sometimes stocks go through phases of exceptional rise at such times even valid trendlines are penetrated quite often by price. I have illustrated this below in the daily chart of JK Tyre. The stock has rallied 10 times in the last 14 months. All the trendlines that I have drawn on the chart below are valid and have touched more than 3 points but eventually all of them were penetrated by price. A sideways consolidation followed after the rally but later on the stock resumed its uptrend. In such cases these trendlines will have little forecasting value and may leave you frustrated for getting out of the stock too soon.

Uptrend Lines drawn on daily chart of JK Tyre since September 2013
Source: Spider Software India

Have you ever used trendlines in your analysis? Do you know how to draw a valid trendline? Share your story in the Club or share your comments here.

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7 Responses to "A good start is half the battle"
KD SUTHAR
30 Apr, 2016
I have 200 equity in physical form of Vitta Mazda, I want to sell it. Your guidance Like (2)
Vijay Kumar Sharma
13 Jun, 2015
I have invested in Ajmera recently what is your idea . I want to read the Charts for gaining the knowledge in the Stock & Currency Market. Please give advice. Like (2)
Manoj
27 Dec, 2014
Trendlines should touch the exact top/bottom or can it be adjusted to touch as many candles as possible without violating the trendline on closing basis & similarly but lower in priority order doing the same to make the trendline as flat as possible by allowing price to pierce through the trendline but not on closing basis (on whatever timeframe we are using). Pls clarify on this with justification for your view, It would be of great help to me.Like (1)
Raviraj
27 Dec, 2014
I do use Trendlines however I give more emphasis on the wave movement. For ex in JK Tyre & Inds the pattern is very good after every small uptrend price consolidates for some time and the uptrend continues which is a very good sign in a trend.Like (1)
vaishnavi
27 Dec, 2014
I also bought JK Tyre at 350 recomended on TV and now it has gone up 80% .TV fellow says sell part profits .wat do you say?Like (1)
vaishnavi
27 Dec, 2014
I bought Monsanto Chem at 650-800 levels .and also Indo Count at 52 .Sh i hold or exit ?Like (1)
Subramanian Ram
27 Dec, 2014
I have read that a valid trendline is one which should be drawn at an angle of 45 degrees & anything higher than 45 is considered too steep and prices will eventually correct. The reason being that markets are extremely volatile above an angle of 45 % and generally it is not considred to be an good entry level.Similarly any trendline below 45 cannot be construed as a valid trend and is considered weak.What is the advice of Apurva Sheth for Intraday trading ?Like 
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