Chapter 9. Line Tools
This chapter explains ErlangerQuote's Line Tools. The line tools are powerful accessories that let you quickly find trends and estimate future changes. They also let you draw resistance and support levels and add text notes to charts. The figure below shows the chart toolbar and the six kinds of lines that it supports.
Figure 1 The Chart
toolbar
Line Tool 
The Line tool is represented on the toolbar by the first line icon with the two little circles at the ends of the line. In normal use, when the chart is selected the arrow cursor button also is selected. The arrow cursor appears when it is placed over the chart. When the Line tool is selected, the cursor changes into a pencil pointer. This is to remind you that you have selected the line tool. The line tool is the most basic tool. It lets you draw a single line from one point to another. The Line tool draws a fixed start and end point so it "sticks" to the time frame it extends over, even when you change the interval, or scroll drag the chart.
There are two ways to draw a line.
Method 1. You can click (hold the mouse button down) to begin the line, drag the cursor to where you want it, then release the mouse button to end the line.
Method 2. You can click (hold the mouse button down, then let it up), move the mouse, then click again to end the line.
To draw a line with the line chart using the two-click approach (method 2), click on a start point. An anchor box will appear and a line will connect from it to the cursor. As you move the cursor the line will follow it like a rubber band. Move the cursor to where you want the line to end. Hold down the Shift key if you want this line to be perfectly horizontal or vertical. Click the mouse to anchor the position of the end point. You should see a chart something like the one below. Here we have used it to mark the highest price that AOL has been in the last year. Once you get good at making line segments you might want to start using method 1, which is faster.
Figure 2A The Line
Tool on a daily chart
To see the effect of the time Interval on this line, click on the weekly interval tab or switch to weekly interval. You now see the chart change to the one below. Note how the line has been scaled to properly fit in the new interval.
Figure 2B The Line
Tool on a weekly chart
Moving a Line or an Anchor Point. After a line is drawn you can select it. To do this click on the line, which will turn on a small square on each end of the line. These are called handles or anchor points. You can then drag an anchor point to move one end of the line, or click on the middle of a line and drag the entire line.
Remove a Line To remove a line, select it by left clicking on it, then you can either press the Delete key or right click and select Remove Line.
Figure 2C The Line
tool menu
Preferences
When a line is first drawn its default properties are used. These can be set with the Line Preferences, which is an icon at the end of the Toolbar. It is also located on the menu when you right click on a selected line. To change the Preferences for the line chart left click on it with the arrow cursor. When it is selected you will see two end anchor boxes appear. Right click and select Preferences… from the drop down menu and the dialog box will appear as shown below. It contains the settings for all the line segments and the default settings for the Notes text and color.
Figure 2D The Line
Tool Preferences
Ray Tool 
The Ray tool is represented on the toolbar by the second line icon with the two little circles. One of which is within the lines. The Ray line is the favorite of many a trader, mostly because its wonderful nature allows either end of it to be extended ahead or behind in time as if time had no ending at all.
What this means is that you can set up a horizontal Ray so that it sits at some level, and projects the Ray to the right forward in time or to the left backward in time. In the case of projecting forward in time as the chart updates each interval, the Ray line will still appear under the new prices. This is unlike the regular Line in the previous lesson where the end points are fixed. The figure below shows a blue and red Ray line pointing to the right. In the next figure we scroll the chart forward in time so you can see how the Ray line is projected forward in time. If the time interval is not changed the blue and red lines will continue to be at the same levels, even though the tops are not in view.
Figure 3A The Ray
Tool
Figure 3B The Ray
line with the chart scrolled forwarded in time
The chart below shows the ray line tool extended back in time (to the left) instead of forward. This can be drawn by simply rotating 180 degrees about the first anchor point.
Figure 3C The Ray
line extending back in time
The Ray line is drawn like the regular line, except there will be a segment extending from the second anchor. When you put down the second anchor point a new line will extend from it. You can rotate the Ray Line about either anchor point. The pivot anchor is the anchor opposite the one you click on. So if you click on the end point anchor it will rotate around the middle anchor. If you click the middle anchor it will rotate about the end point.
In the figure below we have drawn two red ray lines from the highest high to the current high and from the lowest low to the current low. These form a triangle, as lows are closing higher and highs are closing lower. This usually signals pent up volatility and may indicate a breakout is in store for AOL. However, it could be a breakout to the downside as well as the upside, so further analysis is called for.
Figure 3D Two Ray
lines extended to show a triangle formation
Extended Line Tool 
The Extended Line tool is represented on the toolbar by the third line icon with the two little circles placed within the lines. The Extended Line works like the Ray line, except it extends BOTH ends of the line backward and forward in time. The chart below shows an extended line with its two anchor points. The line can rotate around either of these points.
Figure 4A The Extended Line
Retracement Tool 
The retracement tool will generate special "Fibonacci" levels to which your stock might rise or fall. These natural support and resistance levels give insights to the astute traders. Before we get too involved in the mechanics of this indicator, lets diverge for a moment and explore the world of Fibonacci.
The Monk
One nice thing about being a monk is having lots of time to concentrate on things most people find boring. About 800 years ago a monk named Leonardo de Pisa spent a lot of time thinking and looking at series of numbers and discovered an interesting fact. His discovery was very simple, almost too simple.
Take the first two numbers and add them:
1 + 1 = 2
Now take each successive number and add it to the previous number:
1 + 2 = 3
2 + 3 = 5
3 + 5 = 8
Laid out horizontally it looks like this:
1, 1, 3, 5, 8 13, 21, 34, 55, 89, 144...
Our monk, whose nickname was Fibonacci (pronounced Fib-o-nah-chee), saw magic in these numbers. He saw that each number is about 1.618 times the previous number and about 0.618 times the following number.
This series contains some amazing underlying significance. First the ratio of 1.618 appears in nature frequently. You see it in the sweep of the nautilus shell radius as it grows, and the radii of the sunflower. The ratio appears in the Golden Rectangle of the Great painters, as well as in the chaotic systems and fractals. Studies have shown that the average ratio of all rectangles that humans use (doorframes to playing cards) have ratios that include multiples approaching 1.618 to 1. For example a standard door width is about .375 times its height which is close to the Fib number 38.2%. The concept that Fibonacci discovered is this wonderful "natural" ratio, one that shows up not just in nature but in all types of dynamic systems: stocks, auctions, people flow, particle physics. Thus the r numbers are extremely relevant to the natural ways that stocks rise and fall.
Resistance and Support
There are three particularly significant Fibonacci numbers:
23.6%
38.2%
61.8%
These particular "levels" thus represent invisible support and resistance lines. However the 50% and 100% levels are also significant and should not ignored.
Drawing a Fibonacci trend on a chart is done by first drawing a trend line between two points that you wish to examine for Fibonacci levels. In the example below we clicked the Fibonacci tool on the bottom low of AOL around February 20, and dragged the mouse to the peak around March 27. The retracement tool automatically draws a series of horizontal lines intersecting the overall trend line at the Fibonacci levels as seen below. In the figure below, the stock grew quickly from February to its peak, then fell back down to a low in the end of May. The Fibonacci tool showed that the stock penetrated all levels to 100%, and once it got there it has been bouncing off the 50% level trying to recover.
Figure 5A The Retracement Tool showing America Online
Perhaps a more interesting and classic case of retracement can be seen in the chart below of the Nasdaq (COMPX in ErlangerQuote). Here we stretched the retracement tool from the NASDAQ's low in mid October of 99 to its high in March of 2000. Here you can clearly see that the Nasdaq is in a channel between the Fibonacci levels of 38.2% and 61.8%. And just recently the NASDAQ has penetrated the 38.2% Fibonacci level and is headed towards the next level, which is the 23.6% point. This would be a Nasdaq of 4474. Those reading this later will know with hindsight whether the Nasdaq climbed out and overcame this Fibonacci level, or was beaten back down. The point is if you look at a trend and then its reversal, these levels will turn out to be significant and somewhat predictive. Prices will tend to bounce off these levels. Indeed most markets swing off Fibonacci ratios as they move from support to resistance.
Figure 5B The Retracement Tool showing the Nasdaq
Color and Preferences
The Line Tool Preferences dialog box is shown below and is where the values for the retracement levels and their colors are established. We are showing a total of 7 different levels ranging from 0 to 161.8%. Each level was made with the Add tool in the lower half of the dialog box. In these area you can set the color, percentage, thickness and style for the Fibonacci level. You can Add, Update and Remove a level.
The colors you see below were first set up in the Application color palette in Tools->App Preferences->Color Palette. We did this so they will be available later if we make or modify another set of colors for these tools.
All the label options are turned on so that you will see both prices and percent displayed on the screen. The results will be in decimals not fractions. You can control the colors of the Anchor and Vertical line, as well as their thickness. You can also control how far along the horizontal axis the Fibonacci levels extend by clicking on the button "times the distance between the anchor points."
We named these Retracement settings Generic, typed that name in the dropdown menu, and clicked on the Save button.
Figure 5C The Retracement Tool Preferences
5 Up and 3 Down
There seems to be a general rule of mass psychology (or hysteria) that controls the movement of prices so that a price moves 5 waves upward and then retreats 3 waves downward. If there is a real uptrend, then after the 3 waves down, there will follow 5 ways up, then 3 down, and so on. Details on using the Fibonacci ratios with the 5/3 wave pattern can be found at the web site http://www.enthios.com/trading/ This web site is devoted to topics about QCharts and ErlangerQuote that are not found at either web site. You'll find great articles on retracements and regression channels, cup and handle charts, after hours charting, and more.
Regression Tool 
Think of the regression channel tool as a sort of glorified trend line. The tool allows you to set up a "channel" with bands that contain the price swings. These bands are usually 2 standard deviations away from the centerline, which is normally the actual trend line. But the tool also has what seem like magical powers when you place it over an area where there might be a channel. That probably does not make sense but what happens when you click and start drawing with this tool is that it "pulls" itself into alignment with the peaks and valleys of a trend area of the chart and almost forces you to see the trend. For example on the chart below of the Nasdaq, I was not sure where the trend was so I selected the Regression tool and clicked in the middle of the chart near the June area. As I moved the mouse the blue lines automatically snapped into position as shown below. You can see a channel has formed from around early June that has an upward slope. I moved the chart to the left to reveal more projection information. You can see that the Regression tool projects the NASDAQ going higher right now, to over 4200 by October.
Figure 6A The Regression Line
The Preferences for the Regression tool are shown below. You can set the color, thickness, style, and source for all three of the lines. And you can set the distance between the centerline and the channel edges in terms of standard deviations. They default to +2 for the Upper channel and -2 for the lower channel.
Figure 6B The Regression Line Preferences
Text Tool 
The text tool, as its secretive name implies, is for placing text on the chart. The chart below shows a very creative sample we have typed: "THIS IS TEXT". To create text on a chart, simply click on the text icon which is next in line on the tool bar and pass the cursor over the chart. It will switch to a small pencil with a little text icon to help identify that this is text. The text will end up where you click. Start typing immediately. When you are done, right click outside the chart or select the arrow cursor in the chart toolbar. To move the text, left click until you see a border around the text. Then left click on the border and drag it where you want it. To remove or change the text size or color, left click on the text to select, then right click to bring up the menu as shown below and select Preferences.
Figure 7A The Text tool
To enter new text in the box or modify the old text, double click on the text. You will see an insertion cursor that is where text will be when you type. Use the right and left cursor keys to move around in the text block.
Figure 7B Inserting
and changing text
Price Magnet Tool 
The Price Magnet tool forces the anchor points of any line to be attracted to the fixed points of the bars on the graph. You can still park the anchor point anywhere you wish but when your cursor gets close to the open, high, low or close it will attach itself to that point automatically if this icon is selected. This is important when dragging studies on top of price charts because the indicators are designed to work with the open, high, low, and close values. Thus if you place the indicator accurately on the chart, the results it produces are more likely to be accurate.