Valid Trend Line (VTL)

Overview

Once a solid phasing analysis is performed we can begin to assess the current phase of cycles useful for trading. One of the tools to do this is entitled the Valid Trend Line, or VTL. First described in Hurst’s seminal ‘Profit Magic for Stock Transaction Timing’ it was later improved upon in the cycles course and is an essential tool I use everyday, on all timeframes.

Of course ‘trend lines’ are nothing new for technical analysts, used commonly (and incorrectly) for ‘channels’ and such like. Often I will see reports of price ‘bouncing’ off an arbitrary trend line. This is nearly always infact a VTL that has been drawn without any cyclical knowledge at all! In the same manner when a trend line is broken those who are not familiar with Hurst gain no additional information about the future course of price.

The VTL is far superior in that it relies on the inate cyclical nature of markets, centred around a phasing analysis. The status of a cycle can be identified by price interactions and in turn powerful information is garnered for later use in profitable trading decisions.

The Rules

Unlike arbitrary trend lines so beloved of traditional technical analysis, VTLs have specific rules that enables objective trading decisions to be made with the power of underlying market motion in the trader’s favour.

These rules define the validity of a trend line in cyclical terms.

  • A valid downtrend line connects two consecutive peaks of a specific cycle.
  • A valid uptrend line connects two consecutive troughs of a specific cycle.
  • If the VTL is crossed by price between either of the two adjacent troughs or peaks the line is invalidated and can’t be used as a VTL. If this happens the VTL can be shifted to the next trough or peak to provide a clear ‘line of sight’. This intraday VTL post is a great example of an important but subtle point.
  • For a downtrend line only, the trough of a cycle longer than the cycle related to the VTL must not fall inbetween the two consecutive peaks. For example, a VTL cannot be drawn between two 40 day peaks if an 80 day trough has occured between them.
  • For uptrend lines only, a peak of the cycle longer than the cycle related to the VTL can occur and will not invalidate the line. So using the same example a VTL based on the 40 day cycle can have a peak of the 80 day occuring between the 40 day troughs.
  • As a rule of thumb, though not specifically identified by Hurst, I must see a strong break of the VTL by median price to confirm the peak or trough. If price breaks and bounces back, showing median price tracking along the line, doubts must be raised. If median price stays below the line for one or two candle closes I consider it a valid break.

How VTLs help to identify cyclical status

Quite simply, when a VTL is broken by price a peak or trough (depending on VTL direction) of the cycle one degree larger than the VTL related cycle is confirmed. Using Hurst’s Nominal Model which is described in the introduction we can gain some crucial information. Below are some textual examples and visual demonstrations.

  • An upward sloping 160 minute VTL connecting two consecutive troughs is broken by median price downwards. This confirms a 5 hour peak (the cycle one degree higher) has formed. Look back to identify the highest point and mark it as a peak. You now know for the remainder of the 5 hour cycle median price cannot go higher than the peak!
  • A downward sloping VTL connecting two consecutive peaks of the 40 day cycle is broken to the upside by price. This confirms a trough of 80 day magnitude has formed. Depending on how much time has elapsed since the trough formation the trader can prepare to enter a long position.
  • A downward sloping VTL connecting two consecutive peaks of the 20 day cycle is broken to the upside by price. This confirms a trough of 40 day magnitude has formed. However, price then slumps below the recently identified 40 day trough. Since the trader knows where the 40 day trough is he can assess whether a short below the trough level is now the correct trade to take, given the 40 day trough is negated. This is an advanced scenario that happens when trend is strongly bearish (or strongly bullish the case of an upward VTL break and strong move back up above the peak).

Visual Examples: Downward sloping VTL

Click on gallery images to view annotated VTL examples.

Visual Examples: Upward sloping VTL

Click on gallery images to view annotated VTL examples.

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