There are three types of trend indicators; objective, dynamic and subjective. A subjective trend line is a trend line drawn by the analyst based on logical judgment. Moving averages or the Ichimoku Cloud provide a dynamic method of determining the trend – the trend moves with price. Lastly, an objective trend is one which follows a set of rules, does not move with price and removes any personal bias. An example of an objective trend line is the 45- degree point and figure trend line.
It is popular among technical analysts to use dynamic and subjective trend techniques. Objective trend lines are often ignored because little objective-trend tools exist or are difficult to obtain and their utility is heavily underrated. In this blog post, I’d like to show you the power of objective trend lines on Point-and-Figure charts.
It is important to note that the trend line on a point and figure chart shows the constant price per reversal since the x-axis represent the number of columns, or the number of times price has reversed.
When price is above the trend line, the market is said to be in an uptrend. When price is below the trend line, the market is said to be in a downtrend. Trading is a game of probabilities. A traders goal is to increase the probability of a trade succeeding and reducing the probability of a trade failing. Trading with the trend increase the chance of your trade succeeding. Thus, knowing the trend is of crucial important because trades should be committed with the trend – not against it.
Analyse the picture above. Notice how the objective trend lines clearly show the trend. There is no confusion whatsoever – upon glance, you’ll know immediately whether the trend is up or down. Moreover, such objective trend lines show changes in trends far quicker than dynamic and subjective trend lines. Including objective trend lines to your analysis gives you a competitive edge, greater profits and protects losses since you’ll know when the trend changes far earlier than others and most importantly, you’ll know whether you should be shorting or longing.