The red line would be the first line you would draw. They are trading the trend and will only exit when the trend has shown itself to be broken by a break in the trend line. The next trendline is a downtrend. So, shall we learn how to draw trend line to make it our good friend in profitable forex trading?
Forex Trend Lines
We wait to see price retrace to test the former resistance trend line. Will it become support? We look for price action to tell us. Strong momentum in the pullback would have me standing aside until price action showed that there will be support coming into the market.
Trade management is a skill and probably one of the most important skills you will learn as a trader. Learn to lock your profits by moving your stop loss and trailing it behind swing highs or swing lows that form as price moves in favor. The reason for this is that there is less chance of you getting stopped out frequently as you are placing it behind support and resistance levels essentially.
Now, some people may decide to use profit targets while others will take more of a position trading approach with trend lines. They are trading the trend and will only exit when the trend has shown itself to be broken by a break in the trend line. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. How To Use Trend Lines As A Trading Strategy Trading with trend lines as your swing trading strategy uses the rhythm of the market and price action as the core of your trading strategy.
You can not go wrong with that. When price is moving up or down, it forms those higher swing highs and higher swing lows uptrend and lower swing highs and lowers swing lows downtrend. If you draw a trendline connecting a minimum of 2 higher swing lows, you have an upward trend line.
You can see that the trendline had begun to form on March 28 at the first significant low, and the next low had confirmed it. The third low, which I have named Buy 1 , could have been a nice spot for traders to take up buy positions for a 50 pip gain, but for most traders it would have represented another confirmation point for the trendline support.
After that point held firm, trendline traders would have drawn and highlighted the support trendline above, and put in buy limit positions at Buy 2 , taking the EURUSD from 1.
At that point in time, it would have looked like the trendline would never be touched again, as it was so far above. It can be the nearest level of support or resistance according to Pivot Point Levels. Exit the buy position when the low of the bar falls below the support trendline by a predefined number of pips. This predefined number of pips should be based on the average true range ATR of the currency pair for that time frame. Thus, in Buy 1 and Buy 2, you would have suffered very little DD risk for the profit taken, as the trades bounced soon after touching the line.
However, in Buy 3, you may have taken your trade from the line at 1. If you had only a fixed pip stop loss on your trade, you would have been stopped out just before the correction had occurred. The average true range method would have been enough wiggle room to keep you in the rubber band trade as it stretched as far it could go before snapping back. When any part of the price bar penetrates the line on the downside, support may have been broken, or the trendline becomes unreliable.
If the move continues to the upside after the trendline is broken, the trendline becomes unreliable. A breakout is any part of the price bar penetrating a line that you drew on the chart. Some traders require that to qualify as a breakout, the bar component that breaks the line has to be the close.
Sometimes the offending breakout is quickly roped back into the herd, but usually a breakout means that the trend is changing direction, either right away or sometime soon. Selling at the Downward Trendline Resistance The more times that a high of the time frame touches the resistance line without crossing it, the more confidence you should have that it is a valid description of the downward trend.
This is called a test of resistance and encourages sellers to sell more after the price passed the test. Just as traders engineer a test of support, they engineer a test of resistance.
You are hoping that the sellers will rush in to hold the resistance line, and if the resistance holds, traders who were buying will become sellers. Sell when the high of the bar reaches x number of pips of the resistance trendline.
I am starting the downtrend on the chart above for this year only. I start with a swing high on Dec 20, , and get second swing high on Jan 31 , which allows me to form the downward trendline resistance. Trendline traders would have drawn the same trendline and taken short positions at the approximate area of the trendline.
The first short position Sell 1 came at Feb 10, , at 0. The second short position Sell 2 followed in the same month at 0. The third short position Sell 3 came on March 15 , and it would have been much trickier to stay on board with this one without getting stopped out. One would have entered around 0. If you had managed to be still in the game, you would have seen the market fall lower to 0. Exit when the high of the bar reaches above the resistance line by a predefined number of pips. As mentioned before, I prefer an average true range based on the currency and time frame in question than a fixed stop.
In either case, you would have been able to take Sell 1 and Sell 2 with very little open DD, as the trades touched the line before descending. Only a fixed stop of pips or more would have let you survive that trade. Sell 3 was very tricky, and only the more veteran trendline traders would have had the balls to jump back in after being stopped out.
The above strategy helps traders enter or stay in a trend. The trading mistake is staying in the trend after the trendline is broken. Sometimes new traders will be resistant to take a loss, and they keep giving the trade more wiggle room, hoping it comes back. They may even draw in new, flatter trendlines, hoping the market stays bound by them.
However, a trader should always remember that if the reason for staying in the trade is no longer valid, it is the trader's job to take a small loss and move on to the next trade. All traders should be prepared for both the bounce and the break. It is a matter of keeping your mind and eyes open to both possibilities, which can be harder than it seems. Usually when we trade for a specific direction, we develop a psychological bias for that direction, and we are reluctant to swing degrees around and take a trade in the opposite direction.
It would be ideal if we were so flexible, though usually what takes place is that we side with one method or the other. For instance, if the daily or H4 time frame is strongly bullish, you would want to place a buy stop for a breakout through a downward trendline taking place on a H1 or M30 time frame. That way you will be trading with the larger trend current, which would give you a better edge than otherwise.
Draw a downtrend trendline or uptrendline using the rules drawing trendlines discussed above, or auto drawn using the DeMark Trendline Trader indicator. Choose a timeframe that illustrates the setup with the best slope, with preference given to higher timeframes over lower ones. The entry is done on the breakout of the downward trendline or the breakdown of the upward trendline by a predetermined number of pips.
The predetermined number of pips should be appropriate for the currency volatility and time frame. Usually a break of the trendline by 10 pips should be sufficient. I could see a very interesting downward trendline resistance had formed on two swing highs solid red line , and since the larger trend was up, I chose to have a buy stop entry 10 pips above the trendline dotted red line , which was hit at 7: Three bars later it hit my 60 pip profit target.
Since I was about to go to bed at 3: I wasn't about to lose sleep trying to follow the path of the trendline, manually readjusting the buy stop at each new bar. I only needed to rename my trendline object on the chart to buystop1 , indicate the offset already defaulted to 10 pips , and thenceforth the buy stop would appear 10 pips above the trendline in the dotted line and auto-adjust itself as the trendline and market continued forward. It also allowed me to choose a stop loss and profit target, and I chose a stop loss of 30 pips and profit target of 60 pips.
You may even want to experiment with timeouts, counting the number of candles before the target is reached, and if it is not reached in x number of candles, you close out the trading positions.
You can have it a couple of different ways. Attached are account history screenshot of trades taken in two parts as I am unable to take 1 complete screenshot. This strategy is amazing ,hats off for you buddy.
I just want to ask you that i do not have swing zig zag indicator so is there any other substitute? I mean is there any other way to identify swing highs and swing lows? I hope you will reply soon. You really dont have to use the swing zz indicator at all in this strategy. But it does make it visually easy for me identify swing highs and lows in the past and based on that draw trendlines.
In answer to your question regarding substitue: At a minimum of 2 "peaks" or 2 "valleys" is required for you to draw a valid trendline. A line of best fit is usually required if you have 3 or more points to conect. That's a power strategy! As I understood, all your entries are taken on 1 hour timeframe. May I ask, how do you determine what swings to use daily, 4 hour, or hourly for setting stop losses?
Does it depend on the trend line being hit Or am I mixing things up Hi Myronn Thanks for this great job For stop loss, allow me to give an example here: When I place my sell stop order in the 1hr timeframe, i search for the previous swing high also in the 1hr timeframe and put my stop loss just 5 pips above it. If the previous swing high is just above my entry and my stop loss would be like 20pips placed just above it, that is good. Can you take that or not?
When it violates my money management rule, what I do is I switch to a smaller timeframe and that would be the 30min. In there, I look for swing highs that would be much closer to my entry point and and with stop loss that fits my money management and that is where I place my stop loss just 5 pips at least above the previous swing high in the 30min timeframe.
Thats how i do it and i hope you all will experiment and see what fits each one of you individually as traders. Remember, wait for the price to come to the trendlines before taking any trades, dont take anything in between the major trendlines. Patience is the key. Drawing trendlines helps me spot the trend in the market and I know that as price nears that trendline, it does two things: I place my order as described in the strategy.
There will be candles breaking or intersecting the trendline s trying to head in the opposite direction to the main trend.