Trendline trading can be effective over different timeframes, making it an excellent option to add to your forex arsenal.
Here is a closer look at how to trade trendlines and the nuances of this approach.
If the line is drawn off the highs and slopes downwards, it’s considered a downtrend line, which indicates a bearish trend. If the line is drawn off the lows and slopes upwards, it’s considered a bullish trend line and indicates an uptrend.
1. Open a clean chart without any analysis or indicators on it
2. Find the highest price point on the chart
3. Click the line drawing icon on this point and drag it to the end of the chart
4. Move it down slowly until the line touches two (or more) highs
Below is an example of trend lines drawn on a Candlestick chart.
You can open a long position when the indicators give you bullish signals. You will expect the market to move upward toward the top trend line. As it approaches this upper level, you can look for an exit point and take the profits.
If you trade CFDs, you can also profit when the market reaches the upper trend line. This can be achieved by opening a short position when the market gives you bearish signals. You expect that the price will move downward toward the lower trend line. Once it gets close to this level, you can close your position.
If the market has been honouring the trend by reversing it when it gets close to the top or bottom line, most traders will expect it to continue. It takes a significant event for the market to break out of its established range.
Breakouts occur when the market closes above the upper trend line or below the lower trend. A spike in trading volume usually accompanies the breaking of this barrier. If you are determining what event is causing the breakout, you confirm it by viewing the trading volume for the period when the breakout occurs.
Almost all traders consider the move a breakout if the bar or candle for the period closes above the trend line.
If you trade CFDs, you can open a long position when you see an upper-level breakout or a short position if the market breaks out below a bottom-trend line.
Put simply, just because a trader has found a trendline, it doesn’t mean the market is moving in that direction overall. The overall trend may be the opposite, and the move discovered might be a counter-trend, a consolidatory move within the main trend.
Candlestick patterns and indicators like the RSI, Stochastic Oscillator, and MACD can also help you master trend line strategies. They help confirm whether the market will move down or up and give you an early warning about a possible breakout.
After a breakout occurs, the market may fall back to the trend line level it has just broken through. If the breakout is legitimate, it will not cross back over the trend line.