Trading With Trendlines
Trendlines are one of the most important factors when it comes to trading successfully yet you'd be surprised that the majority of traders use trendlines incorrectly.
In this article we're going to show you everything you need to know about trading trendlines from beginning to end.
First do a quick recap of the Trendline Basics to get all the new people here on the same page.
So next HOW DO WE TRADE WITH TRENDLINES?
- There are two main approaches to trading with trendlines:
- When the price finds support or resistance at the trendline, it is time to enter.
- When the price breaks through the trendline, you can enter.
Trendline As Support or Resistance
If a trendline has been found and is acting as support or resistance, you can use it to enter the market after the price has returned to it.
In the above figure, you can see two different trendlines acting as a support and resistance. The rectangular zone at support line indicates a potential long opportunity and the rectangular zone at resistance indicates a potential short opportunity.
- Long Setup
- Long entry after the price finds support at the trendline.
- Stop loss below the trendline.
- Short Setup
- Short entry after the price finds resistance at the trendline.
- Stop loss above the trendline.
A stop loss order can be placed on the opposite side of the trendline. The size of the stop loss is determined by the strategy.
The trendline becomes more significant, the more times the price has touched it in the past
WHAT CAUSES TRENDLINES TO BREAK?
On a price chart, trendlines typically connect a series of highs or a series of lows. Most people who are introduced to technical analysis for the first time are drawn to trend lines due to their simplicity and subjectivity.
In fact, it is their simplicity that makes trendlines one of the most valuable and important tools in a technical analyst's bag of tricks. However, few people pause to consider and communicate the logic behind trend lines.
Trendlines aren't drawn on concrete; instead, they cross. This could be due to a variety of factors, including the news, the market responding to a much stronger opposing trendline, or support and resistance levels.
Trendline Trading Setups
When trading trendlines, there are two types of setups to consider: trendline immediate breakout setup and trendline retracement setup.
When a trendline is broken, it is no longer valid as support or resistance, and the price is likely to continue in the other direction. When a trendline is broken, it is your job as a trader to hunt for a short or long opportunity.
In this section, we'll go over both setups and provide an example of each. So let's get started.
SETUP 1
The above figure represent the immediate breakout sell and buy setups. You may place sell or buy order respectively right after breakout occurs.
SETUP 2
The above figure represent the retracememnt sell and buy setups. You may place sell or buy order respectively right after the price retest the trendline.
Let's put these concepts into action on real-world trading charts and see how well they function in reality.
Immediate Breakout: Sell setup
This is a straightforward trendline breakout setup with no complications. When the upward trendline intersects the downward trendline in this setup, there is little to no hesitation in the downward movement. The market just pulls away from the crossed trendline fast.
Immediate Breakout: Buy Setup
This is a pretty simple and straightforward setup. Once the downward trendline is broken, there is no hesitation in moving upward.
Retracement Setup: Sell Setup
This arrangement is a little challenging. When the upward trendline is broken in this scenario, price drops, waits, and then moves back up to test the just broken trendline before falling. You may call it the pullback or retracement setup after a trendline break
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Retracement Setup: Buy Setup
This is a pullback setup, after the downward trendline has been intersected. Price rises briefly, then pauses and falls back down to find support on the trendline that has just been intersected, before eventually rising again.
Don't you think these are simple setups? Do you understand them and how to apply them in a real-world trading situation?
Don't worry, there will be plenty of complete charts later in this lesson when we look at how to apply what we've learned in real-world trading.
The longer the market remains flat, the greater the outbreak, because when the market decides on the next direction, a new trend starts, and many traders follow this trend.