- 1 The basics of the trend line trading strategy
- 2 How to successfully trade the 3rd rebound from a trendline
- 3 Pros and Cons of Trend Line Trading Strategy
- 4 Is trend line trading strategy profitable?
- 5 Q&A: Trend Line Trading Strategy
- 6 GENERAL RISK WARNING
A trend line trading strategy is simply a trading method which uses trend lines to generate trading signals. A trend line is an additional line drawn on the price chart that shows the inclination to selective series of candles. It is commonly used by traders and it helps in carrying out market analysis. Today, I would like to describe a strategy that is based precisely on the trend lines.
The basics of the trend line trading strategy
In order to draw a trend line, you have to look for the lows and highs on the price chart. When you spot a low, then a high and then a higher low, you will get a trendline by connecting the lows. Such a situation happens on the uptrend.
How do you master a trend line?
You can draw a trend line during the downtrend when you notice high, then low and lower high afterwards. Join highs and you will get a trend line.
Once you have a trend line drawn on your chart, what you are waiting for is the third touch of the line by a candlestick. This is in fact a place where you can open a trading position.
The below sketch presents the trend lines in both, uptrend and downtrend.
The first and second points help you to draw a trend line. At the third touch during the uptrend, you can buy, and during the downtrend, you can open a sell transaction. Using additionally a candlestick pattern would be wise. It can be a wicked candle or an engulfing candle.
How to successfully trade the 3rd rebound from a trendline
Opening a short position with the trend line trading strategy
Let’s look at the exemplary AUDUSD chart below to illustrate how you can use the trend line trading strategy to open a short position.
You spot the high (1), then low and the lower high afterwards (2). This allows you to draw a trend line. The price continues to fall. Now you wait for a pullback to the trend line. The wicked candle appears on the trend line. This is a signal to enter a short position.
Place a stop loss just above this wicked candle that has signalled the trend entry. Take profit should be set at the level of the previous low.
In this example, there is quite a high reward to risk ratio. Such a setup is the most wanted one.
Opening a long position with the trend line trading strategy
Let’s move to the example of opening a long trade. The first low (1) and the second higher low (2) determine your trend line. Now you only have to wait for the third point which is the pullback to the trend line with the wicked candle developed on the support. You can open a long transaction here.
Your stop loss should be placed just below the wicked candle and you should target the previous high. Again, in our example here we receive a really favourable reward-to-risk ratio with today’s trend line trading strategy.
|Low (1) → Higher Low (2) → Trend Line → Long Position
|High (1) → Lower High (2) → Trend Line → Short Position
|Stop Loss: Below the wicked candle
|Stop Loss: Above the wicked candle
|Take Profit: Previous high
|Take Profit: Previous low
Is trend line trading strategy profitable?
The trend line trading strategy is quite simple in use. The most important step is to identify the trend and draw a trend line properly. Then, you just have to wait for a pullback to the trendline and a wicked or engulfing candle formed on the line.
Set a stop loss below (or above, depending on whether it is the uptrend or downtrend) the wicked candle and target the previous high (or low). This will help you to estimate the reward-to-risk ratio. The higher it would be, the better.
There are many ways to use trend lines. Today’s trend line trading strategy focuses on playing from the 3rd pullback from the line. With additional confirmation, this technique works quite well. You can try using this type of signal for subsequent bounces as well, but keep in mind that with each subsequent bounce, a trendline violation becomes more likely.
I encourage you to go to the IQ Option demo account right away and draw a trend line. Use trend line trading strategy to open transactions effectively.
Share your thoughts with our community. You will find the comments section further down the site.
I wish you profitable trades!
GENERAL RISK WARNING
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