I wanted to put a simple, straight-forward article for you together that I think can be really helpful for your trading.
As I often say, this is not a strategy or a trading system unto itself. It is a tool that you can and should use to make you a better trader. Learning trend lines like the back of your hand is a basic but extremely important aspect that should not be overlooked.
What is a Trend Line?
A trend line is a line at which price reacts. Typically, one thinks of a trend line as being angled rather than horizontal – suggesting that price is making higher lows or lower highs. A trend line is usually drawn with the ray tool, but will sometimes be drawn with the fixed-length line tool. I almost always use a ray tool because it continues to the right and won’t be “forgotten” in time.
What is a Trend Line Break?
A Trend Line Break happens when a trend line is “broken”. In other words, when price no longer respects the line and you get a candle close on the opposite side of the line. Of course, if you drew the line using Daily candles, you have to see a Daily candle close beyond the line for it to be considered by some traders as a line break. For the purposes of this strategy, we will consider the line broken when there is at least one candle of the appropriate time frame that has opened and closed beyond the trend line without the wick touching the line in any way.
How Do I Draw a Trend Line?
For starters, you need to understand how a trend line is drawn. Like all lines, a trend line is actually a zone. Price (almost) never just stops and reverses at a line. Because of that, a trend line is often just an opinion. There may be several places where a trend line may be valid. And each place will have a group of traders placing trades to capture bounces and breaks of the trend line. Your job, should you choose to accept it, is to figure out where the largest number of traders will place the line, i.e. the “most obvious” spot. The place where the candle wicks and bodies respect the line more than anywhere else.
Here are a few examples:
EUR/USD Daily Chart
Actually, two of the points define the trend line and the rest of the points assist in confirming the trend line. The more points that “respect” the line, the stronger price will react upon approaching the line. Practice finding and drawing trend lines until they start to jump out at you when you see them.
The more you do it, the more obvious they become to you.
Now, How to Trade a Break of a Line
The best trend lines for this strategy are strong trend lines with a large number of confirming points. The more times the line has been tested and has held strong, the more significant will be a break of the line. The strategy will work with weaker lines, but a stronger trend line break can be traded with more confidence.
Once you have a confirmed break of the trend line (i.e. a candle that has formed completely beyond the trend line with no part of the candle coming into contact with the trend line), you can trade toward the next critical S/R level. Watch for the price to return and retest the trend line. By retesting, I mean, the price will come back after the break and touch the trend line from the opposite side. Many times in trading, you will find that a broken support or resistance level will be retested before the price moves very far away from the line. See the image above.
This is often a great time to add to your position. I am working on a dedicated report that discusses adding to positions as I find it one of the most powerful yet under-used techniques for trading. That report is not finished yet, but my Stackable Carry Trade Report gives you an idea of how adding can be powerful.
How Do I Manage This Trade
If you are using a strong trend line, you can target any of the prior levels the line was tested. A good trend line break will allow you to “mop up” a lot of profit. You may even want to leave a small position running at the end if it looks like it might keep going. Just be sure to use good money management and don’t trade using too much risk. If you’ve read anything I’ve written before this you know that you never “bet the farm.” No trade is ever 100% sure.
Hope this was a helpful resource for you and talk soon!