A trend line is an additional line drawn on the price chart that shows the inclination on 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 lines
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 high and then a higher low, you will get a trendline by connecting the lows. Such a situation happens on the uptrend.
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.
Opening a short position with the trend line trading strategy
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.
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.
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I wish you profitable trades!
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