Trend line pullback indicator

 Can should should show lines and arrows when conditions meet .

The goal of the Trend Line Theory strategy is to find out if a breakout is valid by evaluating:

a)    The trend
b)    The number of pullback - swings
c)    The relative swing length
d)    The swing retracement percentage

To do that, let’s see how we can use trendlines to target the end of a retracement and enter in the direction of the larger trend.

The basic logic in price action analysis is that the stronger a move is the more likely the price will continue to move in that direction.

The same holds true of pullbacks during a trend.

The stronger a pullback is the more likely it is that it will turn into a full blown reversal at the end. And, conversely, the weaker a pullback is the more likely it will be just a retracement and the more likely that the original trend will resume.

And this is where John Hill’s Trend Line Theory will help us, namely in determining the strength or weakness of a pullback.

Note that in order to use this strategy there needs to be what John calls a complex pullback, which is just a pullback with at least 3 swings in it.

In essence, the strategy consists of drawing two trendlines and then analyzing how they interact with each other and with price.
Those 2 trendlines are the 0-2 and the 0-4 line, as John calls them.

•    Point 0 is always the starting point of the pullback. So, that would be the high in an uptrend and the low in a downtrend.
•    Point 1 is the ending point of the first swing inside of the pullback.
•    Point 2 is the ending point of the second swing inside of the pullback.
•    Point 3 is the ending point of the third swing inside of the pullback.
•    Point 4 is the ending point of the fourth swing inside of the pullback.

Now, to get the 0-2 and 0-4 line all we need to do is connect the respective points inside of the pullback. It doesn’t matter which swing point is higher or lower, just connect the 0-2 and the 0-4 points.

So, after drawing the two lines we can get a sense of the strength of the pullback by analyzing the trendlines.

If line 0-4 is steeper then the pullback has momentum and may turn into a complete reversal of the larger trend. Don’t enter on the breakout of line 0-4.

If line 0-2 is steeper then the pullback is weak and the larger trend is more likely to resume. Enter on the breakout of the 0-4 line in the direction of the larger trend.

Let’s look at a few examples so that you can better understand this strategy. First an example of the trendline theory in a downtrend on the EUR/USD pair.

To determine the trend on this chart, we are using a 50-period simple moving average represented with the blue line. The price is clearly below of the MA for most of the time and the MA is sloping down indicating strength of the larger trend.

•    The start of the pullback is the swing low of the initial down move on the left and it’s marked with the number 0 on the chart.
•    In line with John Hill’s trend line theory, the first swing high inside of the pullback is marked with number 1 on the chart
•    The first swing low inside of the pullback is marked with number 2 on the chart
•    The second swing high inside of the pullback is marked with number 3 on the chart
•    The second swing low inside of the pullback is marked with number 4 on the chart