TRENDLINE TRADING PLOTTING DIFFERENT TRENDLINES
When trendlines are drawn correctly, they show a trend in clarity and offer specific information and opportunities to Forex traders.
Trendline trading is a very common strategy within the technical realm of Forex trading. Trendline trading is probably one of the most underrated strategies as well. If a trendline is drawn out correctly, it shows the trend in clarity and offers great opportunities for Forex traders to get into the market.
Trendlines are, essentially, a line of the best fit at either the dynamic area of support or resistance. An ascending trendline indicates an uptrend, while a descending trendline uncovers a downtrend.
Basic features of a trendline
The basic features of a trendline are simple. An uptrend line is drawn along the bottom of easily identifiable support areas and signals an uptrend in price action. They will also accurately show the higher lows in the market.
In a downtrend, on the other hand, the trendline is drawn along the top of easily identifiable resistance areas, the tops of the lower highs.
Trendline characteristics and how to use them
Another note to consider when using trendlines is that the more bounces (touches) a trendline shows, the stronger the trend. A trendline with many bounces would convey that the line is highly respected by the price action and will continue to follow this line to a high degree of accuracy.
You only need two lower highs or two higher lows to place a trendline, but finding a third trendline bounce can be very strong in the current trend direction.
There are two ways in which a price can react to the trendline. The value can bounce off of the trendline and then continue in the trend direction, or there can be a break in the trendline and then a reversal in value.
We have strategies and methods for breaking down these two types of market movements, all of which can produce very profitable trades. We will review the indicators that support these methods and what to look for in terms of indicative entry, stop loss, and target levels.
As you can see from these diagrams, bounces will occur in the market that respect the support or resistance lines and will influence the market trend. Here is an example of an ascending trendline that has made many bounces that have caused the market to trend upwards.
When plotting the simple trendline in a daily and weekly timeframe, aim for a line of best fit. You want to link up the key levels and bounces while removing as little price action as possible. If the trendline appears too difficult to plot due to messy market candlesticks, then the trendline is invalid. Do not force a trend where there isn’t one.
Counter Trendlines (CTL) and Trendline breaks
The counter trendlines shown above are the bold lines that fall opposite to the alignment of the overall trend.
Above are some examples of how the counter trendlines will work in alignment with the overall trend.
There are three signals to look out for when identifying a trendline break. We will need some confirmation to get us into a setup. We look for the momentum formed in the previous candlesticks and find a break, retest, and continuation that occurs frequently in the market.
When looking for a trendline break, we need to see a break, retest, and continuation as shown in the diagram above. We have also shown the point of entry you would use to confirm the setup.
As soon as we achieve a break of the minor support created from the initial break, and the candle closes below those levels, we can short/sell. This technique also works in a bullish scenario if we see a descending trendline in play.
Example of a trendline break
We need to look for a break, retest, and continuation in more clarity when trading breakouts. Eighty percent of the time, the market will act this way around trendline breaks. The initial target, for which you should aim in this scenario, is the first point created on the trendline.
Trendline trading conclusion
Trendline trading is a great strategy for Forex traders to utilise. However, it is important not to draw trend lines by forcing them to suit the market. If a trendline does not fit correctly, then that trendline is not valid! Try to understand how each pair in your watchlist reacts to trendlines and journal your findings for future reference.