APPLYING THE COUNT BACK LINE ENTRY
By Daryl Guppy
Several readers have asked for guidance on the application of the count back line (CBL).For traders who user the Guppy Traders Essential charting pack or tool packs with Metastock,or Ezy Charts, the construction details are unnecessary. These programs have a count backline tool which automatically calculates the placement of the count back lines when the cursor isplaced over a price bar. Metastock and Supercharts users have to complete these calculationsby hand. All users must know the correct starting point for the CBL calculation. The increasingincidence of double bottoms has led to some confusion about which low should be used in thecalculation. These notes are designed to explain the construction process, and to show how thetechnique is integrated with other indicators.The CBL is not designed as a stand alone technique. It is the final step in planning atrade that has been signaled by other indicators. My preferred combination includes the use of straight edge trend lines and the Guppy Multiple Moving Average. The objective is to identifywhen a downtrend has turned into an up trend. The focus is on breakout trading and theobjective is to plan an entry as close as possible to the pivot point low. This is the low that setsthe ultimate low point of the downtrend. We cannot know which bar is this until after the event.But if we know as soon as possible then we have an advantage because we capture the earlypart of the trend change.The CBL is also used to manage entries into an established trend. Here it works as astop loss function, and we will look at this in a later series of notes.When we select a stock we use methods which manage risk at one level. When weactually buy the stock we take on a different type of risk which is broadly execution risk. Thisrisk is complicated by our actual ability or inability to get in or out at the price we would like to.It is a trend following tool which is designed to confirm the reversal of a short term trend.This is an important modifier. The count back line is not designed to identify and define a longterm trend. We use the MMA for this. The count back line is used to select the better entrypoints once we have received trend change signals from other sources. It is a tool that is usedwithin the context of a previous selection.The count back line is used to create a short term hurdle which must be overcomebefore we can have any confidence of a likelihood of a trend change. It consists of four applications.
The first is as a trend change verification tool.
The second is as an entry tool with a defined range of safe price levels.
The third is as a stop loss tool.
The fourth is related to the stop loss function when it is used as an exit tool.Our objective is not to predict the future, but to put the balance of probability in our favor.We start with the trend verification function. Assume for the moment that the MMA chartis already showing a strong potential for a trend reversal. We are looking for a trend change andwe are prepared to follow the downtrend down until we get a definite signal that the change istaking place.The count back line is used initially as a resistance line. It is calculated from the mostrecent low in the current trend. Any action between the count back line and the existing lowpoint is ignored.With each new low, we recalculate the position of the count back line. We wait until weget a close above the count back line before we act. Because we have already been alerted bythe MMA relationship, we can take the count back line signal with confidence. It confirms whatwe already know. As the trend continues down we recalculate the count back line.