How Do We Trade Using A Trend Line?
How do we trade using a trend line?
Two techniques are prevalent.
Enter when the price finds support or resistance at the trend line.
Enter when the price breaks through the trend line
Trend line as support or resistance
When a trend line is noticed and if it’s holding as either support or resistance, enter into the market once the price returns to it.
1 Short entry after the price finds resistance at the trend line
2 Stop loss above the trend line
The above chart is an illustration that depicts the trend line being used as resistance and the price using it to find an entry.
A stop loss is put on the other side of the trend line.
The size of the stop loss is based on the strategy involved.
Trend line break
This technique utilizes the actual breakout of the line which regulates an entry.
The price is not valid as support or resistance when it breaks through a trend line.
The price is expected to reverse direction.
Entering with a trend line break involves two methods.
Enter as soon as the candle breaks through and closes on the other side of the trend line.
1 Short entry after the price broke through the trend line to the downside
2 Stop loss is placed above the trend line
The illustration chart above depicts that as soon as the candle closes on the other side of the trend line, the entry can be immediate.
Stop loss is placed on the other side of the trend.
Wait until the price breaks through the trend line and then tested from the other side as either support or resistance.
Number 1: Price breaks through the trend line to the downside
Number 2: Wait for the price to return to the trend line and find resistance.
3- Sell Entry Once determined that the breakout is true, enter into a short entry
4- Stop loss is placed above the trend line
The chart above is an illustration that depicts a trend line that has been broken after acting as support.
The price then tested it from the other side as resistance, further confirming that the breakout is expected to continue.
Enter a short position and the stop loss is laced on the other side of the trend line.
Caution using trend line breaks
Wait until a candlestick closes on the other side, or tests the other side of the trend line as either support or resistance.
It’s usually not an actual break without a close on the other side of the trend line.
Number 1: False breakout
We can notice from the above illustration that the price moved below the trend line.
The price retraced and the candlestick closed above the trend line.
It could have been considered a loss if the trader had entered immediately when the price broke through.
An overview of the lesson discussed so far….
Lines drawn at an angle above or below the price are known as trend lines.
They hint us the immediate trend and also trace when a trend has changed.
They are also helpful as support and resistance by providing space to open and close positions.
Trend lines are drawn below the price in an uptrend.
Trend lines are drawn above the price in a downtrend.
Two lows must be connected by a straight line in an uptrend.
Two highs must be connected by a straight line in a downtrend.
Trend line should be connected by at least three highs or lows to make it valid.
More times the price touches the trend line, the more it is considered valid.
A trend line break, where the price breaks through the trend line is another technique of trading.