Trend Trading – Understanding Trend Clusters

Chapter 8

The succeeding discussion is based on our research about the creation of the TradeGuider computer program’s automatic trending system which consequently will make the automatic trend clusters.

Trend clustering’s principle is basically an essential part of TradeGuider. For numerous years, chartists have been observing the clear resistance and support of old trend lines on a chart. Before the emergence of computers, one person had to well draw trend lines on hand charts into the future.

The facility that holds large numbers of trend channels and stored by a computer allows us to attempt on putting markings where old trends entered through the chart’s leading edge. The reason behind this idea was to realize the possibility of a meeting between a sharp down-move and resistance after a heavy oversold of the market.

In fact, the results are reasonably shocking. The following examples are absolutely candid and unique.

Every block exemplifies an area where TradeGuider has detected old interesting trend lines. Utilizing only trend lines that start before the present page, the TradeGuider draws the blocks. Moreover, it is unfamiliar with the current chart presented however excluding the upper and lower vertical scaling limits.

Trend Clusters Marking Resistance - Finance Brokerage

Every horizontal block put markings on an old trend line entering through the area where the data is presently plotted. These trend lines may be either many years old or comparatively recent. The main clustering area on the former chart displays remarkable and clear resistance points on the downward trend. Observing closely the chart, you would see frequent up-thrusts along with all the weak market principles in force.

TradeGuider contains no information about the current chart ‘page’ that is being displayed on the screen that’s why the appearance of the trend clusters that are well away from the current price action should be disregarded. The importance of trend clusters is only seen if the price action is plotted near to them. Hence, looking at the previous chart, you can disregard the large horizontal trend cluster which is shown at the top of the screen.

Trend Cluster Indicating Strong Resistance


 

Application of Trend Clusters

You see, the first and most important point is where you can find the appearance of a continuous line of blocks. Avoid extending the line of clusters beyond their natural limits. The trends are meeting in the location where trend clusters were plotted. However, the point where they stop enables the trends to begin at diverging. Divergence will lessen their significance. The clusters provide resistance. Market-makers or specialist can take advantage of the opportunity of the spaces between clusters. Next, imagine the clusters as a hedgerow in the countryside rather than a solid obstacle.

The hedge formulates a penetrable barrier. Similar to an actual hedgerow, there are some ways to prevail in the obstacle. There are numerous forms of hedgerow proposing you with amounts of resistance. In overcoming the obstacles, the method that you will use depends on your desire to cross it.

Trend Cluster Mark a Double Top Formation - Finance Brokerage

Well, you can quit and process at the hedge, striking the hedge at speed and hit your way through it. Choosing any alternatives, you may attempt to pick your way through. In terms of a thick hedge, you may find a way unless an opening emerges.

Eventually, you will realize that professional traders are interested either to test or to cross-resistance with least amount of effort to them. The specialist will be costing money if they will try to cross-resistance. Remember to observe thoroughly the process of how the highs and lows may be testing the resistance, however; there is a tendency that the closing price might avoid the clusters.

In penetrating old resistance, there is a possibility that a sudden widespread down-bar on high – not necessarily excessive – volume would strike through the resistance or a gap down over it. You may observe that there would be a sideway drifting of prices and walk through a gap. Also, you may see the emergence of a sudden move down through a gap. The debate about this is always open.

In the markets, the professionals know the resistance levels because they have the orders in their books. Further, they have a prospect of market’s both sides on the arrival of the orders from around the globe. Also, they are mindful as to when it becomes difficult to interest business at certain prices. One thing is for sure, the resistance to price movement exists either be upwards or downwards movements.

Trend Cluster - Finance Brokerage

Even though the S&P500 appears as a liquid market, it still does not like old ‘resistance‘. Look at point (A), the market-driven up and through the resistance. Remember to observe the process of how price attempts to avoid resistance particularly the closing price. Meanwhile, at point (B), the price is again driven down and through the resistance.

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