The Valid Trend Line (VTL)
The Concept of a Valid Trend Line, is an important part of the Hurst cycle principle, to identify a possible end of specific cycle.
Definition of valid trend line
There is two kind of valid trend line.
valid uptrend line is a line drawn on a price-bar chart from the price lows associated with identified wave troughs.
A valid downtrend line is a line drawn on a price-bar chart from the price highs associated with identified wave crests.
CONSTRUCTION OF THE VALID TREND LINES
The rules for construction of valid trend lines are very simple:
A valid uptrend line is drawn connecting two consecutive price lows associated with identified wave troughs.
A valid uptrend line is drawn so as not to cut through, or intercept price bars on a chart.
In the following chart the valid uptrend line is draw from the first 20 days cycle wave trough, A
To the next identify 20 days cycle trough, B
We will label it the 20 days cycle VTL.
This can be done for all cycles of any length.
The valid downtrend line.
A valid downtrend line is drawn connecting two consecutive price highs associated with identified wave crests.
When drawing a valid downtrend line, there is an important rule to follow,
The valid downtrend line must not be drawn from price highs between,
Which there is a trough of a wave longer than the wave on which the valid downtrend line is based.
This Rule applies only in the case of a valid downtrend line; it does not apply for a valid uptrend line.
A valid downtrend line
In the following chart, the peak A is a 20 days cycle peak, then the market made a 20 days cycle low at 5147.21, after the 20 days cycle formed a low, we have the second 20 days cycle peak at B.
We draw the downtrend valid line from the point A to B.
This is a valid 20 days cycle VTL, because the cycle low between the point A and B is not a higher cycle than the 20 days cycle peak.
A non-valid downtrend line
The peak A is a 20 days cycle peak, after this peak, the market formed a 40 days cycle low at 4953.56.
Then, we have the second 20 days cycle peak at B.
If we draw the downtrend line from the point A to B, this will be a non-valid VTL, because the cycle trough between the point A and B is longer than the wave on which the valid downtrend line is based.
The VTL is based on the 20 days cycle and the trough between the point A and B is a 40 days cycle trough, this will invalid the downtrend VTL.
WHAT THE USE OF A VTL?
The valid uptrend line
When the prices cross below the uptrend VTL, this confirm the peak of the next longer cycle is formed or is in formation.
In the case of a 20 days cycle VTL, when the prices cross below his 20 days cycle VTL, the red circle, this will confirm the highest point (4568.43) before the crossing, will be the peak of the next longer cycle.
The next longer cycle is the 40 days, so the 4568.43 high will be the 40 days cycle peak.
The valid downtrend line.
When the prices cross above his downtrend VTL, this confirm the low of the next longer cycle is formed or is in formation.
In the case of a 20 days cycle VTL, when the prices cross above his 20 days cycle VTL,
the red circle, this will confirm the lowest point (4953.56) before the crossing, will be the trough of the next longer cycle.
The next longer cycle is the 40 days, so the 4953.56 low will is a 40 days cycle trough.
Difference with traditional trend lines?
What is the difference between the trend lines of traditional technical analysis and those of J.M. Hurst?
The first difference:
In traditional technical analysis, we need to wait for 3 peaks or lows to draw the trend line.
The VTL needs only 2 peaks or lows, so there is a time saving.
The second difference:
The Hurst’s VTL is based on something very specific, the duration of cycles, and not random like that of traditional analysis.
In traditional technical analysis, you can take any peaks or lows and draw a trend line.
Third difference:
The J.M. Hurst’s VTL gives us important and precise information.
When the market crosses upwards or downwards, this confirms that not only the current cycle is over (the 20 days), but also the next longer cycle (the 40 days) is over.
We can therefore anticipate the extent of the correction and by combining this with the future line of demarcation, a precise target for the end of the next cycle (the 40 day) can be calculated.
Because the magnitude of the correction will be proportional to the length of the cycle, the longer the cycle, the greater the correction will be.
With the traditional trend line, we do not know the magnitude of the next correction, because the passage of the market below the trend line, can be just short term or long term, it is not based on the time factor.
And finally it gives us the opportunity to exit the market and take profits before the market has fallen too much.
Indeed suppose that you trade the 40 days cycle, you know that this cycle end when the market crosses below its 20 day VTL, so you can take your profits earlier, during the downward breakout of the 20-day VTL.
To make easy to everyone to have a better understanding of the VTL, on my weekly update, I will call the VTL, the cycle trend line.
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