TRENDLINES
Trendlines and finding structure in your chart is key.
Trendlines act a lot like support and resistance levels and are great for providing precise entries.
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They are more significant on the higher timeframes, but more importantly the more touches of the Trendline, the stronger the Trendline.
Like support and resistance levels, Trendlines are not always exact levels, price could spike below or above them, it doesn't matter they are still valid. We use bounces and breaks of Trendlines to provide us with entries for your buy and sell trades.
Trendlines being respected
Here is an example of a bearish trend where sell trades are favoured. So below the trendline is the sell zone and a break above would be an indication that we could see a change in trend.
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This is a significant trendline because on 4 separate occasions price was rejected from this area. So there was potential to sell at points 3 and 4; rejection around these points are a great indication to take the short trade.
Long term, Outer and Inner trendlines
When drawing trendlines it’s really important that you include the long term, outer and inner trendlines. Trendlines provide excellent entries for positions and we don't want to miss out on any of these opportunities. We always wait for a clean break and candle close past the trendline before we enter a position. If you wanted to be even more cautious you may even wait for the retest of the trendline after it is broken before entering.
Counter Trendlines
Another technical tool we use to add further confidence to our trade setups, are called Counter Trendlines.
Here’s an example of how you would use counter trendlines to add to the probability of a trade. The counter trendlines give you another great opportunity to enter a trade. When using theses trendlines to enter a trade we wait for a clean break and close below the trendline for us to feel like it’s right to enter.
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We wait for the trendline break and candle close to minimise the chances of being caught out by a fake break-out, known as a fake out. If you’re patient and stick to your trading plan, then you won’t need to worry about fake outs.
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Rules to trading the trendline buy and sell zones:
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- Work out the trend
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- Plot on your trendlines (long term, inner and outer)
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- Look for the bounces
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- Look for the breaks
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- With breaks, you need a clean break and close below or above the trendline.
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- Work out the ABCD extensions, which we cover later.
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- Apply risk management, stop loss and targets
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If you see an opportunity on the 4 hour timeframe, you need to wait for a clean break and close below or above the trendline on the same timeframe before getting ready to enter the trade.
In this example, we are looking at a 4 hour timeframe and if you look at the break of the counter trendline, you can see where to enter the trade. The end of the red area is where to place your stop loss, your target would be the end of the green area, and after checking the risk to reward ratio is good which in this case is 1:3 you would then enter the trade.
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More often than not when we see a break of a trendline, you will also see a retest of the same trendline. From the retest of the trendline a few things can happen.
Trendline break and retest in bull to bear market on a line graph
Trendline break and retest in bear market to bull
Waiting for the re test of the broken trendline adds a great deal of confidence to our trade setup. We know once price is rejected by the same trendline which used to be resistance that it now act as support.
Don't forget a break of a trendline doesn't always mean a change in trend. Another outcome could be a break, retest and continuation.
A simple way to minimise getting caught the wrong side of a trade is to be patient. In a bull trend we wait for the previous low to be broken before selling like the example above. In a bear trend we wait for the previous high to be broken before buying like the example below.
