A trend line is a line which connects two or more consecutive troughs
or peaks in price. They are not a concept unique to Cyclic Theory, but are used
by technical analysts of many diverse disciplines.
The concept of a Valid Trend Line however is unique to Hurst's
Cyclic Theory. A Valid Trend Line is a trend line which further obeys a few rules
(which validate it). A VTL is drawn for a particular cycle, because the position
of that cycle's peaks and troughs are used in the plotting of the VTL.
There are two types of VTL's:
An upward VTL connects price troughs
A downward VTL connects price peaks
The rules are:
a Valid Trend Line connects the price troughs associated with two consecutive
cycle troughs, or the price peaks associated with two consecutive
cycle peaks.
a Valid Trend Line is drawn so that it does not cut through price (between the peaks
or troughs that the VTL is connecting). Instead of invalidating a VTL, this rule
will cause the VTL to be moved to prevent the VTL from crossing price.
the third rule applies only to downward VTL's: the price peaks
connected by the Valid Trend Line may not have between them a trough of a cycle
which is longer than the cycle for the VTL that is being drawn.
There is one further unstated rule which we will mention here for the sake of completeness:
If an upward VTL is not actually pointing upwards (when viewed from left to right),
then it is invalidated, and similarly if a downward VTL is not actually pointing
downwards (when viewed from left to right), then it is invalidated.
Because of these rules, and particularly the last unstated rule, there are not always
both upward and downward Valid Trend Lines for all cycles.
When Sentient Trader plots the VTL's for a cycle, if it does not find a valid upward
or downward VTL then it will look further back, and plot the last valid VTL that
it finds in the previous three waves of the cycle. The VTL's are referred to as
expired VTL's because they have usually been crossed by price, and their usefulness
is of purely historical value.
How the VTL is used
VTL's are used for analytical purposes and also as tools in the trading decision
process. As is the case with FLD's the importance of a VTL is when price crosses
the VTL:
When price crosses below an upward VTL from above that VTL, a peak
of the cycle one longer (in the nominal model) than the cycle that
the VTL is based upon is confirmed.
When price crosses above a downward VTL from below that VTL, a trough
of the cycle one longer (in the nominal model) than the cycle that
the VTL is based upon is confirmed.
Note that the price which is used for this confirmation is the Median
price.
