I have no doubt that trendlines are very useful to trading and investing, and that support and resistance provide entries and exits for obvious reasons, but is there a reason that trendlines work, aside from the fact that most people use them?

Are trendlines formed from horizontal support and resistance levels?

And would you value fibonacchi retracement, and elliot waves as useful mathmetical tools or just human psychology tools?

I guess I am a firm believer in mean reversion in stock prices, but also believe in things could be a self fulfilling prophecy.


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    $\begingroup$ For quant work a trend is usually defined by the price return over the past N months (either including or skipping the last month) or by the slope of an OLS regression line vs Time. Certainly a human being looking at a chart can sense the trend, but the interpretation is likely to be subjective and unreliable, As for support and resistance levels IMHO they are a visual illusion. $\endgroup$
    – nbbo2
    Commented Jun 10 at 13:35
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    $\begingroup$ There are theories about why trends might (emphasise might) work, such as delayed reaction to information or psychological mechanisms such as disbelief that the price could go up so much (causing mistaken selling by some), but they have not been validated. $\endgroup$
    – nbbo2
    Commented Jun 10 at 13:40
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    $\begingroup$ "is there a reason that trendlines work, aside from the fact that most people use them" - no, and who are these people? I would assert there are as many trendlines that are broken at some unknown point (which is when systematic trades lose money) as there are that trend for a period whilst making money. Knowing before the fact is much more difficult than observing after the fact when no money can be made. Mean reversion also works until it breaks, i.e. when new information greatly changes the true value of an equity either for the better or the worse. Then a new mean regime is established. $\endgroup$
    – Attack68
    Commented Jun 10 at 16:27
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    $\begingroup$ You may want to look at various Cliff Asness writings, particularly on momentum papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=77768 $\endgroup$ Commented Jun 10 at 16:38
  • $\begingroup$ IMHO they are just mumble jumble to sound technical and scientific. They are reference points for someone's algorithms to do something: either buy/sell or stay put. Ultimately they are all total BS. You might just as well ask your favorite astrologer. $\endgroup$ Commented Jun 11 at 14:51


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