*A quick insight in to my trendline break strategy using the USDJPY FX currency pair as an example*
Happy Monday, I hope you are all well! Lot’s to be done this week, I am finally planning on releasing my gap trading strategy guide that contains over 30 years of backtesting data and multiple practical trading examples. That is one to look out for at the end of this week and will be shared on this blog as well as my other social media.
Im going to start this week with a quick “educational” post and show you through the basic strategy that is the trendline break trade. I use this strategy a lot when price is moving in to support/resistance zones on the higher timeframes because I then know that a potential price reversal could be on the cards.
The main benefits of jumping in to positions on the lower timeframes like this is that you can increase your reward:risk ratio of positions with more accurate entries and ride with the, normally, increased momentum that occurs when trendlines/trends are first broken.
Let’s look at an example trade to show you what I mean.
The chart above is a very simple and clear candlestick price chart with only 1 trading tool used – the trendline. This is all you really need to start trading trendline breaks and trend reversals in a very basic format although there are other tools and analysis you can use to assist you.
As always, the key is to keep it simple. I say this a lot but it is very important when trading trends. Just look for the lows and the highs and see whether they are fairing higher or lower. If it is too difficult to tell then the chances are the trend is weak and not worth trading or markets are becoming choppy and this will also be detrimental to a trend based strategy.
You can see on the chart above I have drawn the bullish trendline using the two prominent higher lows and price has then broken down through the trendline with strong momentum.
TOP TIP: I never enter a trade position on the immediate break of a trendline or support/resistance zone. It pays to be patient and wait for the new trend to establish and buy on the new lows or sell on the next highs.
The top tip I shared above is exactly what I have done in the chart sample above. Price breaks through the bullish trendline with momentum but to just short on that candlestick closure would leave you with a position with poor reward:risk. I prefer to wait for the new 1hr trend to establish itself and trade with it.
Selling at the new lower highs or buying at the new hight lows if this was a bearish trend being broken and reversed.
By waiting for the next pullback and effectively “selling high” you end up in a much better position. With a stop loss in the same place and the same profit targets you can easily double the reward:risk ratio of you positions.
Be patient! Waiting to trade with the trend is so beneficial to all traders. it doesn’t matter that this is technically a trendline break strategy, I am still trying to trade alongside the direction of the new trend.
My personal trendline break strategy incorporates a few other technical trading tools and key points of analysis to improve profitability but this blog post covers the basics.
I would suggest practicing spotting trends and looking for potential reversal areas and then moving on to trading the trendline breaks. You can then develop your own strategies and incorporate other points of analysis and hopefully build a very effective strategy.
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