The count back line
A close relative to Dow Theory is the count back line. The count back line (CBL) method was developed by Daryl Guppy and is used to fine tune market entries and exits. Thus when a market stops falling and starts rising, we are faced with the question of when we should enter. Inversely, if we own a share that is rising in price and it suddenly starts falling then when do we decide to sell.
The CBL provides a mechanical solution to these questions and is considered to be a relatively tight stop loss, whereas the Dow Theory stop loss is a wide stop loss. For an entry, the CBL is applied by drawing a line, towards the left, from the high of the bar with the lowest low (also known as the pivot point low). You can see how this is done by looking at the following chart, in the lower left corner.
The first bar that the line hits is then used to set up the second line to the left by starting from the high again. From the next bar in the sequence, a line is then drawn from the high towards the right. A close above this level indicates an entry point. The technique involves three bars (or trading periods) and is called the 3-bar count back line. Hence this technique is adjustable by using more or less bars.
The reverse procedure from an entry is used to calculate the CBL stop loss. The CBL stop loss can be recalculated after each trading period has occurred to provide a new stop loss. Every time a new high is made, the CBL stop loss can be adjusted upwards, otherwise it simply remains where it is. But note that it should never be lowered and therefore it will ratchet up with a rising trend but never drop back when the trend falters. Hence the CBL stop loss is a trailing stop loss and can be seen giving an exit signal in the top right corner of the following chart.
The above chart shows the CBL method being used for an entry and exit on National Australia Bank. The CBL method responds to recent price volatility and adjusts the entry or exit point accordingly. The use of the CBL…
