Trend Scaling

Trends have the awkward property of being fractal in nature, or scale-free. What we mean by this is that their scale is dependent upon the point of observation. If you look at the coast of Britain, you can see that it is jagged. We cannot apply a scale to measure the degree of jaggedness unless we fix the point of observation. The entire coastline is jagged when viewed from a weather satellite, the coast is still jagged when viewed from an aircraft and it is equally jagged if viewed when standing on the shoreline.

Jaggedness is a scale-free description.

When we look at trends, they are often classified as;
• long-term (major)
• intermediate
• short-term (minor).

It is the intermediate trend that is of the greatest use when combined with VSA charting techniques, but what exactly is an intermediate trend? We cannot apply a scale because the height and width of an
intermediate trend varies, even on a single chart. To add to the confusion, a short-term trend on a weekly chart would be an intermediate trend on a daily chart and long-term on an hourly one.
All we can do to place a trend into some sort of classification is to base the classification on the timeframe over which the trend remains useful. If the trend channel is narrow, steep, or broken by a counter-trend in the short-term, then it is a short-term trend. If it exhibits resistance characteristics in the medium-term, it is an intermediate trend and so on.


There are trends and counter-trends within overall trends – this highlights the fractal nature of trends. We could scale down to ever shorter-term trends by reducing the timeframe of the charts, all the way down to low-level tick-frame charts if required.

Why do Trend Lines Appear to Work?

The answer may be derived from our own observations here at TradeGuider Systems, which, although not mathematically proven, suggest a credible explanation of the support and resistance properties of trend lines.
If you draw a moving average line on a daily chart, with a fairly long period, say 50 days, you will notice that there are times where the line is relatively straight, but there still is a noticeable underlying trend to the price movement. The daily prices may swing up and down producing a mean gain or loss around the moving average line, but the trend is still clear.

This tendency has been observed in many types of chaotic data and even random or pseudo-random data. For example, we often hear that unemployment is up, but the underlying trend is down. There may also be references to seasonal variations. Where there is a mean gain or loss in trending data, there may also be a tendency to return towards the mean. In a price chart, we can describe this in familiar terms. Where a sharp rally occurs and moves well above the mean gain slope, it is often followed by a reaction back down through the mean and below it, automatically compensating for the up-move. Of course, this is the property of the mean and not the data.

We know, however, that moves up and down occur in an Index because of an imbalance between supply and demand created in the underlying stocks. As the market is rising, it loses equilibrium. Reactions (short down-moves) follow rallies to restore equilibrium temporarily. In persistent bull moves there may also be periods of re-accumulation or congestion areas, which is another way of restoring a balance. A close study of correctly drawn trend lines will show you the way that the price seems to oscillate within the bounding trend lines. As mentioned before, a trend line seems to offer resistance to a move through it.

You will also notice how, once a trend line has been penetrated, it then seems to offer resistance, but now from the opposite direction.

Using Trends to Determine Overbought & Oversold Levels

The area between the upper and lower trend lines is known as the trading range. When the market is going sideways between the upper and lower trend lines, then the old Technical Analysis term "trading range" can be said to be in effect. In VSA terms, the (sideways) market is trading within its range, and will continue to do so until applied (selling or buying) effort makes it break out.

A trader who uses our VSA principles will analyse price action in the top and bottom quarters of the trading range, because important observations take place in these areas, as the price heads for the supply or support lines respectively.The area above the supply (higher) trend line is known as overbought and the area below the support(lower) trend line is referred to as oversold. You will find this a far more reliable indication than thetraditional methods. The middle of the range represents the mean of the data. Here there is no vulnerability to a move in any direction and the price, in theory, can go anywhere. That is, in theory!