*Revisiting trendline break trades, why I use them and some live market analysis*
I thought I would revisit a previous educational topic in this blog post because I am currently looking at a few major FX currency pairs and stock indexes and seeing potential trade set ups that will use this type of technical analysis. At the end of this blog I have shared 2 potential trades I am looking to enter soon.
Trendlines are a simple tool that can be used by traders to analyse trends within the markets. The main use of a trendline is to use it alongside other points of analysis to support price and find trade position entries that trade with the trend. However, as with all good things in life, they must come to an end at some point and this is where you can use trendlines to find trend reversal entries when they are broken.
The simple line diagrams below show both a bearish trendline bounce and a bullish trendline break.
The basis behind a trendline break trade is that you are waiting for confirmation that an existing trend is reversing and price will soon start moving in the other direction. By waiting for the break of the trendline you can then use it as an extra layer of confidence in your analysis and make sure your next trade position is then trading with the new trend.
This may seem complicated but it really isn’t. My main trend reversal trading strategy that I teach to traders who buy my Mastering The Markets – Retail Trading Course uses the simple trendline and other technical analysis to produce excellent trade positions on the intraday timeframes.
The chart below shows an example of a bearish trendline being broken on the Spot Gold price chart.
As you can see, the key components of a trend reversal are all there. The established bearish trend has a bearish trendline keeping price down and when this is broken and a higher high is made, price goes on to form a bullish trend. Therefore buying after the reversal has taken place would mean you are trading in the direction of the new trend and would enter profitable long trades.
Important! I never enter a trade using only 1 piece of technical analysis to support it. In my opinion, just using a trendline alone will not produce consistent profitable trade entries. You need to use the trendline break in conjunction with other points of analysis to build a case for entering a trade position.
I recommend you review my previous blog posts on drawing trendlines and practice using them so you can become competent at doing so. This will make your trend continuation and trend reversal trade entries much more consistent. You can find links to some old posts on this topic below.
Current live market analysis.
Below are two potential trend reversal trade setups that I am waiting for. They both utilise the trendline break as part of the technical analysis.
EURUSD FX currency pair – potential short trade.
As it stands, EURUSD is beginning to form a double top rejection of the 1.13800 resistance zone. If this zone holds and the bullish trendline is broken (trend reversal) then I will be looking to enter a short position on this FX currency pair.
Because the trendline would be broken, price will have likely made a lower low on the timeframe shown and I will be shorting on a lower high, I am therefore going to be trading with the new trend. Remember, the trend is your friend.
FTSE100 index – potential short trade.
The FTSE100 trade is similar to the EURUSD trade setup except that the bullish trendline has actually already been breached. As you can see on the chart above, price is now below the trendline and 50EMA.
On this instrument I am looking for price to continue downwards and form a new low way below the trendline. This then confirms that the bullish trend is likely reversed and I can then begin to find a short trade entry on the next lower high to make sure I am trading with the new trend.
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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.