Russ Horn

Presents

Trendlines
As a Filter
 Russ Horn Trendlines As A Filter

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 Russ Horn Trendlines As A Filter

How To Draw A Trendline

How to properly draw a trendline might be one of the most frequently asked questions I
get. On the surface, it seems like it should be simple enough to do, but when we start
looking at the variety of different market environments that swing highs and lows occur
in, drawing trendlines can get a little confusing.

Start at the beginning

Let's start at the top. When we draw a basic trendline, we are connecting 2 swing high
points in the market or connecting 2 swing low points in the market. This brings us to
our first obvious question. What are swing points in the market?

I have defined market swing points as points in the market that have clearly rejected the
market.

Swing High:
A swing high is an area that the market has climbed up to and has then been turned
away. From there, the market has clearly moved down as a result. The resulting
formation is also called a "peak" as it will look like a peak of a mountain. The peak itself
will also be known as "resistance". Price was resisted from moving any higher.

Swing Low:
A swing low is a point where the price has dropped down to and then been rejected.
The market then moves back up and away from the rejection level. This move back
upwards should be a clearly visible move away from the bottom that was created. The
market will make a V shape, or be known as a "valley". The bottom of this valley is also
called support. The price was supported from dropping any lower.

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 Russ Horn Trendlines As A Filter

Below is a graphic of what peaks and valleys can look like on a chart. The graphic is
nice and clean without any market noise of confusion.

Below is the same image, but instead of the graphic, we have the actual market. The
peaks and valleys should pretty clear.

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 Russ Horn Trendlines As A Filter

Sometimes peaks and valleys aren't crystal clear. Once in a while they don't have the
pointed top or bottom and it becomes a little more rounded. Other times there might be
a series of lows or highs in quick precision.

In these instances, what I am looking for is the clear rejection from the low or high that
was formed. Price might form a high or low and then hang out at the area for several
candles. If this is the case, then I would not consider it a swing high or low yet. I want
the market to have made a move away from this area and that we can clearly see there
was a rejection of the price.

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 Russ Horn Trendlines As A Filter

Drawing A Trendline
This is where we start to connect the swing highs and lows we have found in the market
for form actual trendlines.

There is an important part to this process. Trendlines must slope a certain way to
actually be considered a "trendline".

Downward sloping trendline

A downward sloping trendline must be draw across the top of the market connecting a
swing high followed by a lower swing high. We will connect two swing highs, the first
being higher than the second.

In the image below, there are two examples of downward sloping trendlines.
You will see that Peak 1 is followed by Peak 2.
Peak 1 is higher than Peak 2.
Peak 2 is lower than Peak 1.
Connecting Peak 1 with Peak 2 creates a downward sloping trendline. In both examples
in the image, you will see the trendline itself is solid green. The extrapolated trendline is
dashed green. Once we draw a trendline, we want to shoot it out into the future, or
ahead of the market. The future price will eventually interact with the extrapolated
trendline.

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 Russ Horn Trendlines As A Filter

Upward sloping trendline

An upward sloping trendline will be drawn under the price connecting a swing low to a
higher swing low.

In the image below, there are two examples of upward sloping trendlines.
You will see that Valley 1 is followed by Valley 2.
Valley 1 is lower than Valley 2.
Valley 2 is higher than Valley 1.
Connecting Valley 1 with Valley 2 creates an upward sloping trendline. In both
examples in the image, you will see the trendline itself is solid green. The extrapolated
trendline is dashed green. Once we draw a trendline, we want to shoot it out into the
future, or ahead of the market. The future price will eventually interact with the
extrapolated trendline.

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 Russ Horn Trendlines As A Filter

Trendlines and
Divergence
We are going to take the next step now and add trendlines to divergence setups.

Trendlines are going to be used to filter a trade setup.

In the following examples, I have removed the DC Lines as they aren't an important part
of the trendline and divergence combination. The Trade Dots are still present because
we will be looking at filtered trades that would have regularly been taken, but were
filtered by the trendline.

Bearish Divergence / Trendline

In a short setup, the divergence line will be drawn above the price and the trendline will
be drawn below the price. The trendline will act as a filter to the short trade. The short
trade will only be taken if the price closes below the trendline.

In the example below, the bearish divergence is present and a trendline can be drawn.
At the time of the signal, the price closed below the trendline validating the signal.

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 Russ Horn Trendlines As A Filter

In the image below, there is Regular Bearish Divergence present, and the market does
make a small attempt to move down. We were able to draw a trendline under the price
connecting 2 swing lows creating an upward sloping line. The price was not able to
close below it, and as a result, the trendline filtered the trade and no trade was placed.

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 Russ Horn Trendlines As A Filter

Bullish Divergence / Trendline

In a long setup, the divergence line will be drawn below the price and the trendline will
be drawn above the price. The trendline will act as a filter to the long trade. The buy
trade will only be taken if the price closes above the trendline.

In the example below, the bullish divergence is present and a trendline can be drawn. At
the time of the signal, the price closed above the trendline validating the signal.

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 Russ Horn Trendlines As A Filter

What is interesting about the image below is that it occurs just prior to the image on the
previous page.

In the image below, there is Regular Bullish Divergence present, and the market does
make an attempt to move up. We were able to draw a trendline above the price
connecting 2 swing highs creating a downward sloping line. The price was not able to
close above it, and as a result, the trendline filtered the trade and no trade was placed.

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 Russ Horn Trendlines As A Filter

Wedge Formation
The best kind of divergence / trendline combination comes in the form of a chart pattern
called a Wedge Formation.

This pattern is used exclusively as a trend reversal pattern, and is one of my personal
favorites. The best Wedge will have divergence and a trendline, so it was built just for
us.

Bullish Wedge
Regular Bullish Divergence across the bottom of the price will be present and a
downward sloping trendline will be drawn across the top of the market. The key to this
formation is the narrowing of the 2 trendlines. The slopes, if projected out to the right
side of the market, will eventually come together.

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 Russ Horn Trendlines As A Filter

Regular Bullish Divergence with a trendline on a chart forming a wedge formation:

A second example of Regular Bullish Divergence with a trendline forming a wedge

formation:

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 Russ Horn Trendlines As A Filter

Bearish Wedge
Regular Bearish Divergence across the top of the price will be present and an upward
sloping trendline will be drawn across the bottom of the market. The key to this
formation is the narrowing of the 2 trendlines. The slopes, if projected out to the right
side of the market, will eventually come together.

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Russ Horn Trendlines As A Filter

An example of a bearish wedge with divergence and a trendline:

Another example of a bearish wedge with divergence and a trendline:

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 Russ Horn Trendlines As A Filter

Best of luck to you and in your trading career!

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