Hello traders! This week’s newsletter comes to you from sunny southern California where I’m teaching a futures class. Today we talked about trendlines, so guess what this week’s letter is about?
In the world of trading, trendlines actually have many uses. For example, you can use them to help define a trend, be it up or down; you can use them to help with trade management, meaning, staying in a trade; you can also use them to help you decide when to get into a trade. Let’s explore these, shall we?
How to Use Trendline to Define a Trend
First of all, way back when you were in second grade and your teacher was showing you how to draw a line, how many points did you need to draw that first line? If you answered 2, congratulations you got it right. However, in the world of trading we need to add a little extra. In trading, we will draw an upward sloping trendline off of two swing lows on the chart, and a downward sloping trend line off of two swing highs on a chart.
On this AUDUSD 15-minute chart, I’ve drawn in a down trendline off of the highs marked 1, 2, 3, 4 and 5. I’ve also drawn in an up trendline off of the lows marked 6, 7, 8 and 9. Now, the EARLIEST I could have drawn in the down trendline is at point 2. Remember, it takes two points to DRAW the line. However, in trading we need at least one more touch of the trendline to CONFIRM that the trendline is valid – meaning that someone with more money than us is drawing in the same trendline and trading off of it. As you can see, price bounced off this trendline at points 3, 4 and 5, confirming that this was a tradable line.
It’s the same but the opposite with an up trendline. The earliest we could have drawn in this line is at point 7, with points 8 and 9 confirming this trendline. There are numerous other potential trendlines on this chart, I hope with a little practice you will be able to spot them in seconds!
Earlier in the newsletter it was mentioned that we can use trendlines for several different things in trading. The first was defining the trend. As long as price is below a downward sloping trendline, we can say the trend is down and we should look for short trades; if price is above an upward sloping trendline, we can say the trend is up and we should look for long trades. Simple enough.
How to Use Trendlines to Keep You in a Trade
The next previously mentioned use for trendlines is a bit trickier. How can we use them to keep us in a trade? In this 480 minute chart of the EURUSD, you could have gone long in the demand zone at the blue arrow. Part of your trade could have been exited at the supply zone where the green arrow is located. But haven’t we heard that “letting our winners run” is how to make the big money? Of course we have. Now, as long as price stays ABOVE the drawn in trendline, we could hold on to part of our position. By following this simple rule, we should have stayed in this trade all the way up to where the red circle is marked, where we broke below/closed beneath that trendline. Not a bad trade at all!
How to Use Trendline to Decide When to Enter a Trade
The third potential use for trendlines is to help decide when to get into a trade. On this 60 minute USDJPY chart, a supply zone has been defined that we would consider going short against.
As price is moving UP to our supply zone, we are in a short term uptrend. You can use a trendline break to give yourself “permission” to go short. If price would have stayed above the trendline, you would have to patiently wait for a break to hit the short button. If price didn’t break the line before trading all of the way through the supply zone, YOU WOULDN’T HAVE TAKEN THE TRADE, which would have prevented a losing trade. Cool trick, huh?
There you have it traders! Three easy ways to use trendlines. For more in depth applications, I’ll see you in class!
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Editors’ Picks
EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.
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