*Learn to trade using the simple and effective trendline bounce!*
One of the most basic yet impressive technical trading tools one can use when analysing the financial markets. The trendline is normally one of the first things you will read about online or in books when you are starting to learn to trade and by understanding how to use them properly, you can successfully improve your performance.
“The trend is your friend” – Said by everyone ever.
So what is a trendline?
A trendline is a line drawn to join the ascending low points (for a bullish trend) and therefore can be used to predict where the next higher lows might form in the trend. This then gives you a possible place to buy in to the market at a discount and benefit from the continued rise. You can also get bearish trendlines which are the exact opposite and the line joins the descending highs of the current trend.
There are multiple ways you can draw on trendlines based on the lowest price of the candlestick or the close price of the candlestick and you should go and experiment with this in your own time.
TOP TIP: If you are struggling to draw trendlines on the candlestick price chart then change it to a simple line chart. Then draw the trendline joining the low points of the line chart and change the chart back to candlesticks and go from there.
The chart below is the same as the candlestick price chart for the FTSE 100 index that is shown above but as a line chart. As you can see, by drawing the trendline across the first 2 low points of the current trend, it is fairly accurate when predicting the 3rd bounce off of the same line.
What is a market trend?
You will need to learn how to spot trends in the market and timeframe you are wanting to trade but that is something that can be learnt and will become easier the more times you do it. In its simplest format, a bullish trend is a market that is forming higher lows and higher highs. A bearish trend is a market that is forming lower highs and lower lows.
Think of the markets like a flight of stairs going up or down and try not to over complicate things. If you can’t spot the current market trend almost immediately then move on to another instrument because the chances are that market isn’t trending and is therefore range bound.
You can still trade range bound markets but instead of trendlines you will need to use support and resistance zones for entering trades. I have covered this in a previous blog post which you can find by clicking the link below:
What you can do is practice finding trends and trendlines on various markets and multiple timeframes before you start trading trendline bounces for real. It will give you an idea of what works and what doesn’t and you will learn to spot when a market is trending and when it is in a range. I believe it was the famous trader Mr Paul Tudor Jones who said “Markets trend only about 15 percent of the time; the rest of the time they move sideways.”
If the instrument you are looking at isn’t trending in the current timeframe then go up to higher timeframe (or down to a lower timeframe) and see if there is a trend that becomes present.
Using trendlines for trading.
So now you know how to identify trends in the markets and draw trendlines, let’s look at how you can actually enter trades using these skills. The act of trading trends and trading with the trend is that you simply buy low and sell high which is key to the success of any business and that is why I like trend trades so much. The reason why this analogy is important to remember is because trading is exactly that… you are buying and selling a product. Just like a car dealership or grocery store.
Let’s look at a trade I am currently in now and I will show you where I have placed my trendline and why I entered a short position where I did. This trade is on Gold (XAUUSD) and as always, you can track the progress live via the TradingView platform by clicking the link below.
Firstly, we have the line chart above that I have used to place the bearish trendline that joins the descending high points – these are marked on the chart. This then gives us a useful point to predict the next reversal and lower high which should appear around the trendline again.
It is important to note that in this example there were not any lower lows on the 4hr chart. The gold chart formed a double bottom at the $1284 support zone but I still believe the lower highs show this commodity is still bearish.
Once the trendline is marked on to the chart I move to the candlestick chart and look for extra confluences and possible entry points for a short position.
If you wanted to keep things really simple you could just enter short on the next rejection of the 4hr bearish trendline. Personally, I like to look for a few more confluences to increase the probability of this style of trade becoming a winner. I apply the Fibonacci Retracement tool to the previous swing highs and swing lows of the trend we are looking to trade and look for the levels that overlap with the trendline at various points.
In this example it was the Fib 0.618 retracement level that aligned with the trendline perfectly. This was at the $1308 per ounce price level and if you look left, there is a small intraday resistance level here.
Another benefit of using the Fib retracement tool is that you can use the extension levels (27& and 61.8%) for profit target areas. As this is a bearish trend, there is a very good chance of Gold dropping to at least the previous lows at $1284 and potentially further to make a lower low. My profit target 1 is at the previous lows and if price breaks through this support zone then I will target $1270 per ounce.
The chart above is the Gold vs USD price chart as at this afternoon. As you can see, price respected the bearish trendline perfectly and the $1308 level held strong as a resistance once again.
I am looking forward to holding this position for as long as it is profitable because short positions benefit from positive swap fees. I therefore get paid daily to hold this position.
I will continue to update this trade and the management for this position on the TradingView platform. I highly recommend you go and check it out because it really is fantastic for doing technical analysis and all financial instruments.
Trendline bounce examples.
Below are a few more examples of using a simple trendline to enter trades on the bounce and essentially buy low and profit from riding the waves of a predominant trend. Enjoy!
EURUSD – 4 hour TL bounce
AUDUSD – 4hr TL bounce
If you don’t have the time to monitor the 4hr charts then you can apply these same principles to the daily and even weekly timeframe charts. I explain how you can do this and swing trade in my book which is for sale on the Amazon book store (click on the picture below).
Swing trading is more suitable for those of you that have jobs or cannot monitor the markets all day/everyday.
Thank you for reading and as always, I hope you have learnt something new or at least built on your confidence to trade using trends and trendlines.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.