The trendline trading uses the trendline which is one of the useful tools provided by IQ Option. It's primarily used to track price movements along with a trend. On the IQ Option platform, it's presented as a graphical tool. This means you'll have to draw it on your chart rather than have the platform apply it automatically.
Since it's used to track the current trend, the trendline is drawn to connect higher lows in an uptrend. On the other hand, it's also drawn to connect lower highs in a downtrend.
Knowing how to draw and use the trendline is one of the important skills you'll need to develop to become a successful options trader. This guide will show you how to do just that.
Note: I'll primarily focus on using the trendline to trade an uptrend. The same principles apply when trading a downtrend.
Key concepts you need to understand regarding an uptrend
Definition of uptrend and downtrend
Uptrend: This is characterized by prices moving higher. Here, bulls are dominating the market and the chart shows longer bullish (green) candles developing. The trend forms higher peaks as the prices keep moving up. In the diagram below, the peaks (2 and 4) continue getting higher.
Price adjustment: An uptrend doesn't mean that sellers are sitting on the sidelines. There will be many attempts by sellers to bring prices down. This results in price fluctuations. When sellers temporarily take control of the markets, the prices will temporarily fall. This is a price adjustment. However, buyers soon take control of the markets driving prices higher.
In the diagram below, the price adjustment occurs between 2 and 3. At point 2, buyers are the dominant force. However, sellers step in driving the prices down to point 3 before buyers eventually take control driving prices up to point 4.
You should note that any trend will have some price adjustments. In the case of an uptrend, you'll notice that the bullish candles will have some bearish candles tucked between them. These adjustment areas form the support and resistance levels along with the trend.
Trendline trading in the uptrend on IQ Option
Next, click on the graphical tools feature and select trendline. On an uptrend, connect the higher lows with the trendline as I've done in the snapshot below.
Trendline trading: where to enter your trades?
Consider the chart below.
Using the above chart, you'll notice that the uptrend has peaks 2, 4, 6, 8 and 10. At these points, the price bounces back (price adjustment) before resuming the trend. Never enter into a trendline trading position at these levels. It means you'll have to enter a sell position which isn't recommended when the trend is up.
The best points to enter buy positions are 3, 5, 7 and 9. As the trend progresses, your trade positions should be shorter. Remember that the trend is bound to reverse any time in the future. If you manage to enter the position at 3, your buy trade should last considerably longer than if you entered the position at 5 or 7.
Trading trendline breakouts
All is well when the price respects the trend line and further profitable trades in line with the trend can be opened on this basis. But what if the price breaks the trend line? Such situations are also included in trendline trading. It is possible that this is a trend reversal. But it is equally possible that the market is consolidating and the trend may still continue. In such a situation it is worth looking at where on the chart the price slowed down before breaking the trend line. If the breakout occurred at an important support or resistance level, then it is quite likely that the trend will change. If, however, there is no additional confirmation of a possible trend change, then it is worth waiting to see how the market continues to behave. Perhaps the trend will continue and we can correct our trendline and trade further in line with its initial direction. Trendline trading requires careful observation of price action at all times.
Does trendline trading work?
Trendlines have their supporters and opponents. Supporters use the properties of this tool to conduct transactions every day. Training and skill in drawing lines on a chart is not without significance. Opponents say that the tool is not very objective and allows different people to draw the trend lines differently on the chart. There is some truth in this. But at the same time developing a consistent method of drawing trend lines ensures relative repeatability of results. And this is what trendline trading is all about.
Trendlines are a good tool to use when you want to confirm a true trend. It comes in handy when you're trading long positions. As you've seen, it's quite simple to draw and use a trendline on your charts.
Now, head over to your IQ Option practice account and try out this feature. We'd love to hear about your results with trendline trading in the comments section below.
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