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Trading the trend and breaks

Fri, Mar 20 2009, 13:05 GMT
by Valeria Bednarik

FXstreet.com Independent Analyst Team

I always post here that we should wait for breaks or confirmations. Breaks of key levels of support and resistance or trend lines. So I will tell you the basic rules to trade with trend lines, I hope you will enjoy these basic education tips!

As you may know, we always say that it is better to trade following the trend. This means that in a bullish market we should buy to take profits by selling. Of course we can trade against the trend - in fact I do it all the time - but we must be aware that against the trend, movements will have less strength and probably be shorter, meaning the number of pips accomplished will be inferior than if you follow the trend.

But of course, while a trend line remains unbroken, the market trend is still considered to be valid. If we are working with daily charts - the example works with any time frame of course - and if during that session, price passes the line but then closes above it, we shouldn’t consider that a break and we should wait for a confirmation. When the session closes under an ascendant trend line, we are on our way but we will now have to add a filter. One filter could be the percentage: when the line is broken we decide to wait until that break reaches x % (to be determined by the trader in his strategy). Another filter can be the time, like waiting until at least one more session closes under the line. These kinds of filters are subjective and will then depend on each trader's decision, but it is important to use at least one that helps us confirming the new trend. On the other hand, filters delay signals, so we should not use more than one, maybe two if we have found out that we are getting too late into the market.

So as we said before, in a bullish market, we should buy every time price reaches the ascendant trend line, but if price breaks the trend line, we should stop buying. In other words: we buy waiting for a rebound and when the line is broken, as it will sooner or later, we should close the position and assume the loss. It is highly possible that we take more profits during the trend duration, and so, a small loss will not affect our profits.

Primary trend, Secondary trend and Correction movements

Generally, inside the same chart, you can see different trend lines. One of them will probably define primary trend, others the secondary and so on.

In any big chart, daily or weekly, we see there are corrective movements that in fact are small descendant trends of a minor range. In smaller charts, like one hour ones, we will find out that there are small bearish trends against the bullish major one. So how can we solve and understand all these lines? Well the answer here is to use one basic rule: we set our primary trend in the following bigger chart than the one we use to trade, meaning that if for example we trade 1 hour charts, we will set our trend lines in a 4 hours chart.

In the case we are daily traders, meaning we use daily charts to analyze a buy or sell signal, then we will have to define our primary trend in a weekly chart. If the weekly trend is bullish, we should try to trade buying, taking advantage of valleys or corrections we can see in daily charts. If we work with one hour charts, then we must look for the primary trend at daily or 4 hours charts, and use valleys and corrections of one hour to trade.

In this daily chart of Gbb/Usd, you can see an example of a descendant channel (blue), our primary trend. In red, you have the Intraday trend lines, which is our secondary trend

Published on  Fri, Mar 20 2009, 13:06 GMT