The Trend is Your Friend!
Tradefair Weekly Update 
/ Editor / 24 July 2008 / Leave a comment
Buzzwords of the week; tip 3
Many analysts like to draw trend lines on price charts. A trend line is a sloping line drawn between two or more prominent points on a chart. It is used to identify whether a trend is still in tact or has been broken. Some rely solely on trend analysis to make their trading decisions.
Technical tip of the week
You can draw trend lines on charts using the Tradefair Spreads platform. First find the market you want to look at and click on the 'chart button'. Then click on the 'draw lines' button and follow the instructions. When prices are going up, the trend line is drawn beneath the prices. When prices are going down, the trend line is drawn above the prices. One popular approach is to position the trend line so that all of the price information is contained next to it and the prices touch it at least twice. The longer a trend line lasts, the more significant it is. When prices cross over (or break) a trend line, this is a signal that the trend may have ended.
Making money from a trend line break
Back in May 2008, the FTSE 100 had been having a good run-up from the March lows, and a clear short term up-trend was in place. On the chart, a trend line could be drawn beneath the prices. However, by the close-of-play on 23rd May, prices had clearly penetrated below that trend line, and for some traders that set up an opportunity to go short (sell).
After the long bank holiday weekend a number of traders opened new down bets on the FTSE 100 on 27th May. Two critical factors to consider when opening a new bet are: 1) where to get out if it goes against you (losing), and 2) where to get out once it is going your way (profit). For a down bet of this nature a wise strategy to follow would be to: 1) get out if it moved 100 points away from where you entered the bet, and 2) if it went your way wait for price to go above the highest price of the previous week before closing.
Using this approach if you had got in to the bet early on 27th May you could have sold the FTSE 100 at around 6120, with an initial stop at 6220, and the bet would have lasted until 21st July; when you would have closed it around 5390. This equals a 730 point profit. For an initial risk of just 100 points this is an excellent ratio of reward to risk.
Recent developments in the FTSE 100
The bears have had it mostly their way since the end of May, but there has been a glimmer of hope for the bulls in the last few days. Last week, the FTSE 100 finished higher than it opened for the first time since the middle of May. Although the price was pushed way down to below 5100, by the end of last week a big rally brought prices back up to near where they had started at the beginning of the week. This is good news for the bulls. But if we draw a trend line above the recent decline in prices we can see that this line has not yet been penetrated and many traders will want to see that happen before calling the end of the down-trend.
The two, previously referred to, key trend lines have been added to this chart of the FTSE 100, produced via the Tradefair Spreads platform.
Happy Trading!
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