Trendline Breaks – Continued…

*More explanation and analysis of how I trade trend reversals*

This blog post is following on from last weeks post where I showed you the basic analysis behind my trend reversal “trendline break” strategy. A very simple way of spotting trends reversing and entering positions with relatively good reward:risk ratios. I would like to continue on this topic further and show you more examples of how this works in a live market environment.

If you haven’t read my previous blog post that I am referring to then please click on the link below:

I am a big fan of using the trendline drawing tool, my basic trend spotting abilities and a few other technical tools to spot when a trend might be reversing and enter in the new directional bias.

There are a few key points I want you to note about trading trend reversals like how I have shown you previously and will show you again today. They will have a big effect on the success of your trades.

  1. Know what timeframe and trend you are trading. You need to know what trend you are trading in order to get in to profitable positions with reward worth your risk.
  2. Be patient. You are waiting for an established trend to stop in order to trade with a new trend. This may take time and you should not enter before your strategy rules are met.
  3. Don’t be greedy. You need to set treasonable profit targets and conservative stop losses. Trading aggressively can ruin your long term profitability.
  4. You will lose – get used to it. Much like tule number 2, you are trading in the belief that an established trend has finished. This can sometimes lead to false signals and reversed trends continuing. Risk management and your trading psychology will be your friend here in the long term.

Let’s get right in to it and I will show you another example of a typical trend reversal trade set up that I have taken this year. This first trade is on the FTSE 100 Index.

FTSE 100 Index 1 hour timeframe chart

The entry style is similar to previous examples and incorporates 3 main points of analysis. The bullish trendline has been broken, price made a new lower low on this break and has come back up to retest the trendline and make a lower high.

The assumption made at the point of entering a short position are that this is indeed a lower high being made now and therefore the new 1hr trend is going to become bearish. This assumption is part of the risk fo taking the trade and the decision to enter is helped because of the large bearish momentum candle that then closed showing the potential new lower high.

Again, there are a few extra parts of the pre trade analysis for this FTSE 100 short trade that I have not shown on the chart. These are part of my own personal strategy and I use them to further push the probability of success in my favour.

Top Tip: Build up a complete picture by saying what you are seeing on the chart. Then use this to create your directional bias and find your trade entries from there.

The same chart is shown below with my points of analysis marked on for your reference.

FTSE 100 Index 1 hour timeframe chart
(With extra annotations)

Let’s look at how the trade progressed and I can talk you through my trade management and why I took profit where I did.

FTSE 100 Index 1 hour timeframe chart
(Short position exit)

You can see that after the initial bearish momentum candle that was used for the entry signal for short positions, price began to fall. The lower high was confirmed a few hours later and price went on to break previous lows and the 1hr 50EMA.

I held the short positions through the first profit target areas because it found resistance at the 1hr 50 EMA and continued to make lower highs as it broke through both the 0.618 and 0.786 fibonacci retracement levels. As explained in the previous chart images, my higher timeframe bias was bullish to I was aware that the probability of price breaching the lows at 7535 was low but it did manage to do this!

I was willing to hold my short positions until the bearish trendline was eventually broken and retested and a higher low was formed. Strong bullish momentum was coming in to the market at this point with a large bullish engulfing candle closure and price back above the 1hr 50EMA.

Trendline Break Example 2: GBPAUD FX Currency Pair

GBPAUD 1 hour timeframe chart

This trade example is very similar to the previous one but a long position. There is also the added confluence of a market price gap that many traders are often scared of but when understood, and used correctly, they can be a great analysis point.

At the point of entry, price had broken a bearish trendline and made a higher high. There was also 2 consecutive higher lows made showing that the number of buyers supporting price at this level was growing. I took a long position on the retest of the trendline with the nice bullish wick rejection candlestick that formed.

For those of you looking in to my analysis in more detail, there are 2 other key confluences at this zone that showed why I entered a long position here. Try changing timeframes and seeing what they were.

GBPAUD 1 hour timeframe chart
(Trade exit)

As you can see in the chart above, the 1hr trend did reverse as expected. Price struggled to break there 1hr 50EMA dynamic resistance for a few hours before it gained huge buyer support and broke upwards. It then made new higher highs and higher lows for the next 4 trading days before finding new resistance at 1.77200.

My stop loss was conservative at 70 pips which is large compared to my normal 35 – 40 pip stop losses on intraday trades but GBPAUD can be “spiked” and volatile. Even with a 70 pip stop loss, this trade netted a return of 5.11R before fees.

Top Tip: Make your stop loss larger when you first start using/learning a new strategy. Get the method right, get some experience on the books and then work on your accuracy.

So there we have it, another blog post based around trend reversals and trading the trendline break. I hope you have gained a little more knowledge on what I use to spot potential reversals and try to get the probably of success as high as possible.

If you are interested in learning the extra parts of my own trend reversal strategy then please send me a message via the Contact Me page.

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.

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