Trendline Basic Trading Strategy
Published on Senin, 20 Januari 2014
07.30 //
Trading Strategy,
Trading system
Trend Line is my favourite visual tool, i can use it at any time frames, any currencies. here is the great explanation how to use it, Written by Rob Pasche
A trendline is probably the most basic tool in the
technical trader’s toolbox. They are easy to understand and can be used
in combination with any other tools you might already be using. By definition, a trendline is a line connecting two or more lows or two or more highs, with the lines projected out into the future.Ideally, traders look at these extended lines and trade on prices reacting around them, either trading a bounce of the trendline.
So, what can we do to make sure the trendlines that we've drawn are sound?
1 – Connect Swing Lows to Swing Lows (or Swing Highs to Swing Highs)
We want to draw a line connecting either two (or
more) swing lows or two (or more) swing highs. For those unfamiliar with
the term swing highs/lows, we simply mean the peaks and valleys created
with zig zagging prices. Once we connect peaks with other peaks or
valleys with other valleys, we want to see the line not being broken by
any candle between those two points. Take the examples below.
Draw Unbroken Trendlines
(created from FXCM Marketscope 2.0)
In the first image, you will find that we
successfully drew a line connecting two swing lows. But, between those
two points, the price broke through the line that we drew. This
invalidates the trendline.
What we want is what we see in the second image, two
swing lows connected together by a line unbroken by price. This is a
valid trendline that is ready to be projected out into the future.
Next time price gets near this trendline, we will
want to look for a bounce. A convenient way of trading this type of
setup is using Entry orders. Entry orders can be set to get you into a
trade at a specific price.
I like to set my Entry orders several pips above a
support trendline or several pips below a resistance trendline. That way
if the price reacts before getting to the trendline, I still have a
chance at getting into a trade. You have to remember that if there are
many traders looking at the same price to act as support/resistance,
there is a chance that orders will be stacked around these levels. If
there are enough orders keeping the price from getting to the trendline,
the price might not get to you order if it’s placed directly on it.
The More Connecting Points, the Better
You've probably noticed that I have referenced two or morehighs/lows
make up a trendline. The reason I mention "or more" is because
trendlines can continue to be relevant far out into the future and can
be bounced off of several times. As a general rule of thumb, the more times a trendline has been hit and respected with a bounce, the more important the market believes that it is. Like
anything, however, trendlines cannot last forever. So after a multitude
of bounces, one has to expect a break to eventually occur.
The first reason this is true is that you can draw a line connecting any
two points on a chart. Just because there were two distinct highs in
the last 50 bars and you drew a line between them doesn't actually mean
the line is a valid trendline. What you would have is a potential trendline.
To truly validate a trendline, you need to see the
price actually react from a line projected from a trendline drawn based
off of two prior points. Essentially, a third high/low is needed to
truly solidify a trendline. Once you have this, you can then feel better
about looking for opportunities to exploit the market when price
reaches the trendline again. While having a third high/low is
recommended before looking for a trade, it is not required. Aiming for
an entry on point #3 below could work out just fine.
Validate Trendlines
(created from FXCM Marketscope 2.0)
Each time you see the price bounce off the same
line, the more likely it is that others are watching it too and are
playing the same game you are. This could help you get several good
entries in a row, but remember trendlines won't last forever. So you
want to make sure you set proper stop losses to get you out quickly if
the support/resistance trendline eventually fails.
Buy Bullish Trendlines, Sell Bearish Trendlines
The trend
is your friend! This steadfast rule also applies to trading trendlines.
For experienced traders, this basically means we should only look to buy at bullish support lines and sell at bearish resistance lines. For traders not into trading jargon, let the following images below explain this to you.
Buying Bullish Support Trendlines
(created from FXCM Marketscope 2.0)
An upward slanting (bullish) trendline means the price has been trending up, so we want to look for buying opportunities. Buying opportunities occur when the price drops down and comes close to the trendline that has caused upward bounces before.
Selling Bearish Resistance Trendlines
(created from FXCM Marketscope 2.0)
A downward slanting (bearish) trendline means the price has been trending down, so we want to look for selling opportunities. Selling opportunities occur when the price moves up and comes close to the trendline that has caused downward bounces before.
Trading only in the direction of the trend well let
us exploit potential trendline bounces as efficiently as possible. And
while they won't always give us winning trades, the trades that are
winners should give us more pips than had we been attempting to place
trades against the trend.
(Note: There is also the potential to trade a break
of a trendline rather than a bounce, but that is a more advanced
technique. This is something to be covered in a future article.)
Connecting the Dots
Coming full circle, trendlines are a very simple
tool to use. You are connecting dots on a chart. But hopefully the 3
tips above will help you take drawing trendlines to the next level. Make
sure that the lines you draw are connecting two or more highs or two or
more lows, but have not been broken by the price between those points.
Remember to look for at a 3rd bounce to validate a trendline. Also, make
sure you are taking advantage of trading with the trend by looking for
buys in bullish markets and sells in bearish markets.
Overall, I hope this makes you more confident in drawing trendlines. Good trading!
---Written by Rob Pasche
website: http://www.dailyfx.com/
Professional traders already have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, but professional traders are not looking for a new trading technique or trading system (because they are already trading correctly). New traders do not have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, and new traders are exactly the traders who are looking for a new trading technique or trading system (and even worse new traders are often still looking for the holy grail of trading).
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