Trendline strategy is widely used by many professional forex traders worldwide. It is one of the best and most reliable trading strategy.
In this post, you will learn what is a trendline, how to used it, and how to trade it. So, Let’s dive in…
What is a trendline
A trendline is a simple but very effective diagonal line that is used by traders to make trading decisions.
there are two types of trendlines: discending and ascending trendline.
How to draw an upward trendline
An uptrend market simple tells you that the market is going up and you should be looking for long or buy opportunities.
An upward trendline is an ascending diagonal line drawn below the market price using a minimum of 2 troughs.
Once you have identified a minimum of two peaks, connect those peaks with a line and wait for the price to rally back down for the 3rd time.
Wait for the price to touch and close above the ascending trendline.
Place your buy as soon as the candle closes above the trendline.
Place your protective stop loss few pips below the candlestick that touches the trendline
Take profit target
For take profit, you can use the previous high as your take profit.
Below is a live chart example of an uptrend trendline I took on EUR/USD few weeks before writing this post To show you how to trade ascending trendlines
As you can see, i bought as soon as the 3rd troug was touched.
I was aiming for +700 pips with a 35 pips stop loss.
The trade went as i anticipated, few weeks later, my take profit level was hit and I was out with a very beautiful risk: reward ratio of 1:20.
How to draw a descending trendline
A downtrend market simple tells you that the market price is trending down and you should be looking for sell or short opportunities.
1. To draw a trendline in a downtrend you will need a minimum of 2 peaks.
2. A downtrend trendline should be drawn above the price.
3. Once you have identified a minimum of two peaks, connect those peaks with a diagonal line.
4. Wait for the price to rally back up for the 3rd time.
5. The candlestick that touches the descending line must touch and close below the trendlline.
Protective stop loss
Place your stop few pips above the candlestick that touches the trendline.
For take profit target
Use the previous swing low as your take profit target.
To manage your your trades, I’ve written a post on how to control your stop loss here.
Below is a live example on EUR/JPY i took before I wrote this post .
The reason I took this trade was because of the market price touching the trendline for the 3rd time.
Since this trade was based on a daily timeframe, it took weeks before my profit target was hit.
Trendlines are not a foolproof- they get broken. Nothing is absolute so you can’t expect to have winning trades all the time. Always remember that large time frames ( daily, weekly, and monthly timeframes ) provide reliable trendlines.
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