The following Glossary of Terms is provided to help you familiarize yourself with the terms and concepts used in the Trendline Pro indicator.
Glossary of Terms
•A Pivot Point is a bar with a high or a low price that supercedes all of the bars in the general vicinity. In the Trendline Pro indicator, you have the ability to specify exactly what constitutes a pivot point in terms of the number of bars on either side that must be superceded. This is called the size of the pivot. The default setting is to identify all pivots that have a size of 3 or greater. This means that, to qualify as a pivot point, a bar must either have a high price that is higher than the high price of the 3 bars on either side or a low that is lower than the low price of the 3 bars on either side. Once identified, pivot points are used to calculate support/resistance zones and trendlines. Pivot points are displayed as colored up/down triangles on the chart.
•Support/Resistance Zones (aka S/R Lines) are price areas that have acted as support and/or resistance in the past and, it is assumed, will again in the future. Support/resistance zones are calculated by Trendline Pro using pivot points. All of the pivot points are collected and analyzed for clustering and any resulting clusters are identified as support/resistance zones. Each support/resistance zone is rated by the number of pivot points that touch that particular price level. The more pivot points that touch the price level, the stronger the support/resistance zone is likely to be. Support/resistance zones are displayed as colored horizontal lines on the chart and they are drawn from the oldest pivot that touched that particular price level. Note that we use the terms support/resistance zone, support/resistance line, S/R zone and S/R line interchangeably within this document.
•Gap Zones (aka Gap Lines) are areas on the chart where price has gapped from one bar to the next. There are two types of Gap Zone situations that the indicator will highlight: a Gap Up situation is where the Low of the current price bar is greater than the High of the prior price bar and a Gap Down situation is where the High of the current price bar is less than the Low of the prior price bar. A Gap Up zone will tend to offer support to future price action and a Gap Down zone will tend to offer resistance to future price action. Note: the word "Gap" as it is used in the context of Gap Zones should not be confused with the term "Gap Weighting", which is a measure used by the indicator to determine trendline strength.
•Trendlines are also calculated from pivot points. As each upper and lower pivot is being analyzed by the program, the slopes of lines drawn from each pivot to every other pivot are analyzed for total number of touch points, distribution of touch points, for breaks, and for proximity to current price. Touchpoints are areas where regular price bars and/or pivot points are within a minimum acceptable distance of the trendline and breaks are areas along the trend line where the price has pushed through by more than a maximum acceptable amount. Once all of the valid trendlines have been calculated, they are classified by slope of line, total number of touchpoints and proximity to current price. Trendlines are displayed as colored lines of various slopes on the chart.
•Ignore Zone is a term used to describe an area on the price chart where trendlines will not be checked for breaks. The Ignore Zone is typically set to include the 3 or 4 most recent price bars. Its purpose is to allow you to see trendline breaks as they occur so you can make trading decisions before the invalidated trendline is removed from the chart. On the chart, the Ignore Zone is represented as a grey bracket in the vicinity of the most recent price action.
•Slope is the term used to describe the angle or trajectory of a trendline. A slope of 0 would indicate a perfectly horizontal trendline. A slope greater than 0 would indicate a rising trendline and a slope less than 0 would indicate a declining trendline.
•Tolerance is the percentage of price that constitutes a Break or a Touch of a trendline and is used to determine whether or not a trendline is valid. If a trendline is broken at any point between the oldest pivot and the Ignore Zone, the trendline is considered invalid and is discarded. Conversely, all data points between the beginning of a trendline and the end of a trendline are analyzed and each time the price is within the Tolerance of the trendline at that point in time, the trendline's touch count is incremented. The high price is used when testing upper trendlines and the low price is used when testing lower trendlines. In the Trendline Pro indicator, Tolerance is calculated by taking a fractional multiple of the security's current Average True Range (ATR) value.
•A Touchpoint is any point where price touches, but does not exceed, a calculated trendline. Remember that the allowable distance that constitutes a 'touch' is governed by the current Tolerance value. Touchpoints are important in determining the strength of trendline. Given two trendlines of equal length, the trendline that has the greater number of touchpoints would typically be considered the stronger of the two.
•A Break is any point along a calculated trendline where price pushes past the trendline by more than the current Tolerance value. Once a trendline is broken, it is considered to be invalidated and is discarded.
•Channeling is the word that describes the tendency (of many stocks) to bounce up off a lower support zone or trend line and then to move up and eventually bounce down off an upper resistance zone or trend line. When this behavior extends over many bars, it forms a price channel that the stock appears to be following. Channels can be horizontal, upward-sloping or downward-sloping. Price channels, if they exist, are very easy to identify when trend lines and support/resistance zones are displayed on a chart.
