Trend line trading strategy. Trendline Trading Strategy - Trading with Smart Money
Trend lines are practical tools for tracking and trading trends. It makes sense to form trading strategies with this simple but useful tool. They can visualise the trend lines with actually drawing them.
By Casey Murphy Updated Jun 25, Uptrends and downtrends are hot topics among technical analysts and traders because they ensure that the underlying market conditions are working in favor of a trader's position, rather than against it. Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices together.
The resulting line is then used to give the trader a good idea of the direction in which an investment's value might move.
Predictions and analysis
In this article, you'll discover how to use this tool. It won't be long before you're drawing them on your own charts to increase your chances of making a successful trade!
- Phillip Konchar November 13, Markets like to trend as supply and demand are not always in balance.
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For related reading, see Short- Intermediate- And Long-Term Trends and the tutorial: Stock Oscillators And Indicators Trendline Basics Understanding the direction of an underlying trend is one of the most basic ways to increase the probability of making a successful trade because it ensures that the general market forces are working in your favor.
Downward sloping trendlines trend line trading strategy that there is an excess amount of supply for the security, a sign that market participants have a higher willingness to sell an asset than to buy it.
The Utility Of Trendlines
As you can see in Figure 1 when a downward sloping trendline black dotted line is present, you should refrain from holding a trend line trading strategy position ; a gain on a move higher is unlikely, when the overall longer-term trend is heading downward.
Conversely, an uptrend is a signal that the demand for the asset is greater than the supply, and is used to suggest that the price is likely to continue heading upward.
Figure 1 Trendlines can vary drastically, depending on the time frame used and the slope of the line. Support and Resistance Trendlines are a relatively simple tool that can be used to gauge the overall direction of a given asset, but, more importantly, they can also be used by traders to help predict areas of support and resistance. This means that trendlines are used to identify the levels on a chart beyond which the price of an asset will have a difficult time moving.
This information can be very useful binary options example traders looking for strategic entry levels or can even be used to effectively manage risk, by identifying areas to place stop-loss orders.
#2: Minor Trend Line Break (Conservative Retracement)
Technical traders pay particularly close attention to an asset when the price approaches a trendline because these areas often play a major role in determining the short-term direction of the asset's price.
Drawing Your Own Trendlines As mentioned earlier, trendlines are simply lines that connect a series of prices to give the trader a better idea of where the price of a particular investment is headed. The problem comes with figuring out which prices are used to create the trendline.
As you may know, the open, close, low and high prices are easily obtained for most stocks, but which of these prices should be used when creating a trendline?
There is no one, distinct answer to this question.
What to Avoid When Trading Trendlines
It is entirely the trader's decision when it comes to choosing what points are used to create the line and no two traders will always agree to use the same points.
Some traders will only connect closing prices while others may choose to use a mix of close, open and high prices. Regardless of the prices being connected, it is important to note that the more prices that touch the trendline the stronger and more influential the line is believed to be. In general, upward sloping trendlines are used to connect prices that act as support, while the given asset is trending upward.
Trendline Trading: What to Do (And Not to Do) - My Trading Skills
This means that upward sloping trendlines are mainly drawn below the price and connect either a series of closes or period lows. Conversely, a downward sloping trendline is generally used to connect a series of closing prices or period highs, that act as resistance while the given asset is trending downward.
This is similar to what is shown in the chart above. We should note that it is possible to use two trendlines on the same chart.
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- Now before I dive into specific Trend Line strategies and techniques, you must first learn how to draw a Trend Line correctly.
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However, this method, known as a channelgoes beyond the scope of this article. To illustrate the concept of drawing an ascending trendline, we have chosen to look at the trading action of AutoDesk Inc. As you can see in Figure 2, the trendline is drawn so that it connects the lows illustrated by the black arrows.
Once a trendline is established, traders trend line trading strategy expect to see the price of the asset to continue to climb until the price closes below the newly formed support. Figure 2 As time goes on, we can see in Figure 3, that the price tested the support of the trendline again in August This is important because the more times the price touches the trendline, the more influential the line is said to be.
The price action illustrated by the arrow on the far right would be used by traders as confirmation that the trendline is valid. In this case, traders would look to enter a long position as close to the trendline as possible.
Figure 3 Once a technical trader has entered a position near the trendline, he or she would keep the position open until the price moved below the support of the trendline. Most traders will constantly adjust their stop-loss orders by moving them higher, as the trendline continues to slope upward.
Trendline Trading Tips
This method ensures that a trader can lock in as much of the gain as possible, without being taken out of the position too early. Keeping a stop-loss order below an influential trendline is a strategic way to ensure that the asset has adequate room to fluctuate, without getting whipsawed. In this case, using the ascending trendline as a guide of an expected move higher would result in a very profitable trade, as you can see in Figure 4.
Figure 4 The Bottom Line Trendlines are used commonly by traders who seek to ensure that the underlying trend of an asset is working in favor of their position. This strategic advantage is available to any trader willing to take the time to learn how to draw a basic trendline and incorporate it into his or her trading strategy.
To learn more about chart patterns, check out the Technical Analysis tutorial.