by Johan Kriek (email@example.com)
I was asked by a number of people over the past week in the Live Trading Room the following:
“WHEN IS A VIOLATION CONFIRMED?”
“AT WHAT STAGE DO WE START TRADING IN THE NEW DIRECTION?”
Well fellow traders, here is your answer in plain and simple:
One of the rules of the DOW THEORY is that “a trend will remain intact until it gives a definite reversal”
This means that even if a trend is violated, you’ll need to wait for that VIOLATION TO BE CONFIRMED before adjusting your trend lines
If you have a look at the above chart you will see that price violated the bull trend’s support line but the violation was only confirmed once price came back to test that violated trend line again
Remember the golden rule of supply and demand?
A support line is a demand line. These demand lines are synonymous with bulls, but when such a demand/support line is violated then suddenly it becomes a supply line or resistance line
So, price comes back to find resistance at previously violated support and thereby creating a lower peak and also confirming the violation. Look at the example below:
This is a one hour chart of the Cable. See how price violated the bear trend’s resistance line (supply) and then came back to confirm the violation by finding support at previous violated resistance (now demand)
Even though is great and text-book, please note that technical analysis is not an exact science and I have seen price move back into the violated channel on numerous occasions
Nevertheless, I am and will always be a firm believer of the above and of course the Dow theory as a whole
If you want to learn more about technical analysis and learn how to trade using the Probability Study technique, register yourself a seat here: http://www.fxinstructor.com/eng/courses/probability-reserve.php
I hope this answered your questions!