To trade Breakouts using Trendlines in Forex, wait for breakouts confirmation on the trendlines.
A trend line is a technical analysis tool traders use to identify the direction of a trend.
in case of an uptrend, you draw the trend line below price and above price for a downtrend.
This reminds us that, in case of any breakout on the trend line, the trend changes direction.
When trading breakouts on trend lines, it is more valid in trending markets than ranging market.
Therefore it’s also important to choose where to trade.
How do you trade breakouts using trend lines in forex?
First, identify the current market trend.
If it is an uptrend, draw your trend line on the lower side of the trend/support trend line. For a downtrend draw a resistance trend line.
Your trend line should touch perfectly the higher lows for an uptrend and the lower highs for a downtrend.
Next, wait for the breakout confirmation on the trend line.
When price breaks the trend line, it signals a probable reversal in the current trend.
Therefore we trade in the opposite direction of the initial trend.
The breaking candlestick must close below or above the trend line as confirmation.
Buy entry trade signal
The breakout is above the resistance trend line. Place a buy after the signal confirmation.
2 ways to trade breakouts using trendlines in forex after confirmation;
- Enter a trade immediately after a breakout confirmation.
- Wait for a price retest and then enter a trade on the second confirmation.
We have circled entry points on the chart below. Take a look.
On the chart above, price broke the resistance trend line and then retested the trend line.
The doji candlestick pattern bounce off the broken trend line is confirmation for the second buy entry.
After entry, set your stop loss just below the trend line below the previous lows.
The first target can be set on immediate resistance zone and second profit target on previous highs zone.
Sell entry trade signal
If the breakout is on the lower trend line. The breakout is below the support trend line.
Take a sell position after the signal confirmation.
Similarly, follow the same procedure as for a buy entry and sell.
In this case,
The bearish candle closed below the support trend line is confirmation for sell signal.
The Stop loss is set just on the previous highs.
The target can be immediate support zone or previous lows.
However, if you are a conservative trader, you can always wait for price to retest/pull back to the trend line before you enter the trade.
Waiting for price retest may sometimes lead you to miss out on some trades especially when price breaks out with high volatility and doesn’t retest. But it sometimes saves you from fake outs.
Trend line breakouts on chart patterns
Trend lines can also be used on any kind of chart patterns to identify significant break out levels.
Some of the patterns include double bottom and tops, head and shoulder,triple tops and bottoms, and any pattern of your choice.
The entry level is defined at the break of the trend line.
For example;
let’s take a look at how you can trade the inverted heads and shoulders chart pattern below.
Entry level on the inverse heads and shoulders is at the break out of the neckline.
The confirmation is the bullish candlestick closing above the neckline after the breakout.
With chart patterns, it is easy to set stops and target levels.
In this case,your profit target is equal to the distance from the neckline to the head of the pattern as indicated on the chart above.
Your stop loss set below the right shoulders or below the head depending on the volatility. Most important is to have a favorable risk to reward ratio.
Let’s do a small recap on how to basically draw trendlines
How do you draw a trend line
On your trading platform, select the pair you intend to trade.
Uptrend Trendline (Support),
- Pick at least two or more bottoms
- Draw a line connecting the bottoms it the direction of the trend.
- The more bottoms you find the stronger the trend line.
Downtrend Trendline (Resistance),
- Pick at least two or more tops
- Draw a line connecting the tops in the direction of the trend.
- The more tops you find the stronger the trend line.
After you draw a trend line, you wait for the breakout confirmation
In summary
- To trade breakouts using trendlines in forex, wait for the breakout confirmation on the trend line.
- You can take position immediately after a breakout confirmation or wait for a price retest and take the second confirmation.
- While trading a trend line break out, your target profit can be set depending on the price volatility and the past price behavior in the market such as levels of support and resistance.
- Stop loss should be set a few pips below or above the trend line for a buy or sell trade.
Make sure you have a good reward to risk ratio on the trade signal.
Trend lines work better in a trending markets and you just require 3 points to validate your trend line.
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