Psychotic
Trendlines
Original thinking leads to profits in short-term trading.
Even the simple process of drawing a trendline allows unique ways to look at the markets.
Common TA wisdom sees a trendline whenever 3 or more relative highs or lows can be
connected in a straight line. "Filling in the dots" sketch lines under rising
trends and over falling ones. But using BOTH highs and lows to locate
drawing points will create many legitimate trendlines as well. These psychotic
trendlines contain predictive properties that traders can use for profitable entry
decisions.
Logic dictates that drawing a straight line across any 2
relative highs or lows produces a random extension with no predictive force. But in his
best-selling book Methods of a Wall St Master, Vic Sperandeo proved this
2-point method could locate breakouts when combined with specific drawing and trading
rules. Psychotic trendlines can be utilized in a similar manner. But since they represent
pivots as often as support/resistance levels, a simple buy/sell at the line won’t
work. So how can they assist us in our trade preparation?
First locate these original lines on a chart of interest.
In addition to highs and lows, PTs tend to cross right through gaps. Once located,
identify the tendency of the PT by its slope (up or down) and whether it acts more as
support or resistance. In a vacuum, trade in the direction of the bias. For example, if
downsloping and resistance, the sell should be better than the buy.
The real power of psychotic trendlines comes when
combining them with the pattern landscape. Quite often, they will intertwine with double
bottoms, tops, channels and first rise/first failure retracements. PTs can then be used as
a method of cross-verification. In this process, they set up right at the point where
pattern features expect a breakout, breakdown or major reversal event. If price then gaps,
it confirms a breaking event while candle reversals confirm a swing event.
One of the simplest methods for predicting PT behavior is
to assume support/resistance will hold the first two times that price strikes it and fail
the third. But this tendency can’t be relied upon unless other elements of your
analysis confirm it. And make sure you look for psychotic parallel price channels as well.
These can appear and disappear for years through the axis of a market’s constant
up/down swings. When multiple PPPCs criss-cross, they point to converging events that
carry very high reward: risk.
