Hello, Forex traders! This week we're going to take a look at a very simple trading technique that seems too simple to help us make decisions. Very often beginning traders believe that trading has to be complicated to be effective. If trading is really easy, why isn't everyone making money doing it? If you NEED trading to be complicated or complex, stop reading now and definitely don't come to one of my classes!
Before we start looking at this trend line technique, I must re-emphasize the often quoted fact that properly identified supply and demand levels are the most effective way to trade - giving us the lowest risk, highest reward trading opportunities. Occasionally, we may miss these optimum reversal trades and must follow the trend by using one of our trend-following techniques.
Using trend lines to define our trend is an easy way to figure out which direction the chart is taking us, and which type of trade we should be looking for - long or short. The way we discuss trend lines in class is that it shows where the traders in charge of this trend are doing their business, buying the dips in uptrends and selling the rallies in downtrends. In the following AUDUSD chart, the upward sloping blue trend line labeled "1" is showing where the bullish traders are aggressively buying the dips in the uptrend. As a reminder, we like to say that it takes two points to draw a line, and the third is our trading confirmation.
The downward sloping red lines on this chart indicate where the bears were in charge - at least for those few candles! Notice that where these opposing trend lines intersect resemble triangles. Obviously, price can't stay inside these triangles forever so the action is to trade in the direction of the broken trend line. Another reminder is that trend lines act as angled support/resistance lines. As I'm sure you recall, what was a support line can become a resistance line, and vice versa. Notice how the broken red trend lines were acting as resistance, but then became support? Nice little odds enhancer isn't it?
Notice the yellow shaded demand zones - the reason I choose to indicate these swing lows is because those two lows showed the enthusiastic bulls who came in and bought BREAKING THE DOWNWARD SLOPING RED TRENDLINES from the double blue arrows. The two retests in these demand zones gave a couple of very easy, high probability entries to join the overall upward trend.
So, if the triangles work on the long side, do they work on the short side as well? Of course! In the following EURUSD chart, the downward sloping trend line labeled "1" is showing where the bears are doing their business, while the shorter red lines are showing where the short-term bulls are in charge.
The double arrows are showing the origination of the downward moves that had enough power to break the upward sloping trend lines. Drawing in the yellow supply zones give you an easy indication of where you could consider entering a short trade to join the bears in their continued down move.
Hopefully, watching the triangles of these opposing trend lines will help you join trends already in progress. Hope to see you in the next class!
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.