Alternative trendlines

Most good traders will use simple trendlines in one way or another, whether to define the trend or to identify trading opportunities via bounces or breaks. A traditional trendline is drawn along the lows in an uptrend or the highs in a downtrend, beginning at the start of the new trend. I prefer not to use traditional trendlines for the following reasons. Traditional trendlines are straight lines, while price never moves in a straight line. Also traditional trendlines provide limited trading opportunities and when price does return to the trendline, it is usually because the move has weakened. Finally, the main reason I avoid using basic trendlines is that I don’t like to have the same ideas and signals and ideas as all other traders. When I was learning to trade I had the mindset that there was a right way to trade, there was a specific set of indicators and you needed to trade the same way as everyone else. After doing everything ‘by the book’ and losing trade after trade, I realised that the most obvious an opportunity is and the more people who have the same idea, the less likely it will play out. I don’t know exactly why this is the case, probably because trading is a zero sum game and someone must lose for you to win. What I do know is that to be profitable in trading, as in any industry, you need to have a niche, a point of difference. You need to be able to find value where others can not. Other variations of trendlines such as equidistant channels, or Andrew’s pitchfork etc have the same limitations as they are straight channels and are slow to form and provide fewer trading opportunities. One of the most successful traders in recent times incorporates a similar methodology El Mostafa Belkhayate uses an indicator which calculates the static centre of gravity and three lines either side which represent standard deviations

calculated according to Fibonacci ratios. The limitation with this method it is a lagging indicator and fits the form of the price retrospectively. I like to think that my technique is similar but a more direct and exponential version, using only the most recent points.As a substitute to standard trendlines, I prefer to use a tool known as the Gann fan. There are right ways and wrong ways of drawing Gann fans and I admit that I definitely use it the wrong way. To begin I will connect the two most recent swing highs and the two most recent swing lows with a direct line. I then draw a Gann fan from the second point along the trendline, the most recent swing high or low, and extend the centre line along the straight trend line. I will only use the 1x2 and the 2x1 in most cases only selecting the one which I think best fits the shape of the price. You should then have something resembling the diagram below.

Each time there is new swing point formed I will redraw the fan. If you are able to identify, out of the 1x2 and the 2x1, the line which best fits for the highs and the lows you will end up with either a channel or a triangle or wedge. In many cases it will be obvious which line to use. In a nutshell, if price is gaining momentum to the upside, use the upper line and if price is losing upside momentum use the lower line.
 The way to trade this is very simple. First rule is the same as always, only ever trade in the direction of the prevailing trend as defined by the direction of the moving averages. This differs slightly from pair to pair but my default is 21 ema and 89 ema on the 4 hour timeframe. The second rule is, only trade in the direction of the lines, only buy off of an ascending line or sell off a descending line. If those two conditions are satisfied, look for a candle to close to the line. It is okay if price crosses the line as long as it does not close beyond the line. Open a position at the open of the new candle. To exit your position, you can wait until the trade is invalidated with a 4 hour candle closing below a key level such as a trend line, moving average or round number support/resistance. Again, I would recommend using a traditional stop loss as I believe it is only significant where price closes. Of course it is different if you are unable to watch the trade or if there is very high volatility expected. Take profit levels are different because we are trying to take advantage of the extremes in price. Take profit areas will obviously be just inside the opposite line. You will often find you are better off without a take profit at all, waiting for price to hit your trailing stop loss. As long as you are trailing a trendline or moving average and not a standard trailing stop, especially in times when the market is trending well. When choosing an area for your stop, always look for risk reward of better than 1:1. I would recommend using a dynamic line such as a trend line or moving average so that you can lock in more profit as the trade progresses.
I encourage you to look at these lines not as an exact science but as a very rough guideline. In mostcases you will find that the best opportunities are from a bounce off of a moving average or round number before price reaches the lines. The idea is to enter on the close of a candle that fits the criteria you have identified and not worry about exact touches. If you have the attitude of a perfectionist you will miss out on almost all opportunities. The power of this technique is that it allows you to identify opportunities to enter the market on its terms as the market does not operate in straight lines.

When you are tempted to trade against the prevailing trend keep this diagram in mind. Ideally you would like to be buying at point A and C and getting out at point B. However, even if you bought at point B you would have probably made a profit. On the other hand, if you had made the perfect short trade, selling at point B and exiting at point C, the best you could hope for is break-even. You can see that you can be right and still not make money. So no matter how tempting a setup looks don’t try and fade the trend.


This is an example of the lines drawn on a current chart of USDJPY. The straight lines in grey are regular trendlines the white lines are Gann fans drawn with the beginning at the most recent trendline touch. The trend is clearly an uptrend so I would be looking exclusively to go long. If you look closer you can see that the distance in time from the first low to the first high is further than the second low to the second high which is a good signal that momentum is wearing off. As such I have only drawn the 2x1 lines and not the 1x2 lines. In the chart above price is close to the straight trendline which could be a popular point to go long. however with the obvious slowing of momentum, I will be waiting for an opportunity closer to the bottom 2x1 line. If I then entered I would calculate the distance from the entry price to my profit target just below the upper 2x1 line. This would likely be around 90 pips in this case, so I would make sure my stop loss is much less. In the chart above the moving averages aren't really in play so I would rely on round number support at 99.5. If price closes below this level I will exit the position. In this case that would mean a risk on average around 20-25 pips better than R:R 4 to 1. As a side note, I measured the first swing low to high as 65 periods and the high to the next swing low as 37 periods and 37 from there to the next high, numbers in sequence on the ordinal cross marked in red. I just mention this to emphasize my point in a recent post about the importance time as a trading tool. I especially take note when I find numbers in the coloured sequences below. Even if you don't use the numbers in this way, I would still recommend counting distances from highs to lows as a measure of momentum.