A Two-Step Plan for Trading Trendlines with Price Action

Chris Pulver – Senior Currency Strategist at Market Traders Institute – offers a timeless lesson on how to use trendlines with price action. It can be as simple as staying with the trend on the left side of the trendline, and waiting for confirmation to trade the right side of the trendline.

Chris will help you discover the difference between trade anticipation and confirmation. To know more about the systems, tricks, and strategies that he uses to target profitable trades, you can sign up for his free weekly newsletter here.

Trendlines are one of the most common forms of technical analysis in Forex trading. They are widely used by traders for knowing the entry and exit timing of an investment.

As the name suggests, trendlines are nothing but the levels used in technical analysis that can be drawn along a trend in order to represent either support or resistance levels for the price of an asset.

And understanding these trends – uptrend, consolidation, and downtrend – goes a long way in implementing a well-designed trading strategy.

So, let us take a look at what trendlines are and some strategies you can follow to interpret the trend and potentially profit from it.

Revisiting some basics, here are some terms related to trendlines…

When the price of an asset is rising, connecting the lows with a line gives you an ascending trendline – which is called an ‘uptrend’ or ‘bullish trendline.

Bullish trendlines act as a support level indicator and as long as the price is above the trend line, the uptrend is considered intact.

On the other hand, when the price of an asset is falling, connecting the falling high levels with a line gives you a descending trendline – which is also called a ‘downtrend’ or a ‘bearish trendline.

Downtrend lines act as resistance level indicators and as long as the price is below the trendline, the downtrend is considered intact.

Here’s a look how these lines show up for an asset or currency pair on a chart…

Bullish Trendline on RHS and Bearish Trendline on the LHS

 

Source: SmartTrader, Market Traders Institute

With that, let’s go over how you can interpret these trendlines for setting up trades…

Trading the Bullish Trendline

One important lesson while reading trendlines is to look for the left side vs the right side of the trendline to interpret how the trend is performing.

Let’s take the bullish trendline as an example to understand this.

We will see the price rising to higher highs in this case. Draw a line at all the low price levels of this rally and you have a bullish trendline (the blue line in the image below).

And when we talk about trading this trendline, we’re basically trying to BUY at all the low price levels of this rally. So, whenever the price touches the blue trendline, we buy and average our positions to try and sell at higher levels for potential profits.

The most important thing to remember while trading this trendline is to look for when the price is consolidating or falling and the uptrend seems to be coming to an end. A simple way to do this is to look where the price is inching towards – the right side or the left side of the trendline.

If the price is on the left side, we still have the uptrend intact. However, if the price is on the right side of the bullish trendline, it indicates a stop or break in the uptrend. And this is where we would look to sell positions for potential profits.

So, the two simple ways to trade a bullish trendline are:

  • Buy at lows when the price is on the left side of the trendline. This is also called the anticipation phase as we’re anticipating the rises and setting out to buy the rally here.
  • Sell when the price breaches the bullish trendline and starts diverging and moving on its right side. The right side of the bullish trendline is also called the confirmation phase as the price is confirming a break in the uptrend when it falls below the trendline.

Trading the Bearish Trendline

The same principles we saw above hold true for trading bearish trendlines.

In the case of bearish trendlines, we will see the price falling to lower lows. Draw a line at all the high price levels of this fall and you have a bearish trendline.

While trading this bearish trendline, we’re basically trying to SELL at all the high price levels of this downtrend. So, whenever the price touches the blue trendline, we sell and average our positions to sell at even lower levels to try and capture potential profits.

The important thing to look for while trading the bearish trendline is to look for when the price is consolidating or rising and the downtrend appears to be coming to an end.

If the price is on the left side, we still have the downtrend intact. However, if the price is on the right side of the bearish trendline, it indicates a stop or break in the downtrend. And this is where you could sell your positions for potential gains. You could also start buying at these lower levels if you see a bullish trendline pattern forming.

So, the two simple ways to trade a bearish trendline are:

  • Sell at highs when the price is on the left side of the trendline or the anticipation phase.
  • Sell positions at lower lows or start buying fresh positions when the price breaches the bearish trendline and starts diverging and moving on its right side or the confirmation phase.

So, those were two simple yet effective ways in which you can read bearish or bullish trendlines and use them with price action to try and capture some potential profits.

Chris Pulver, Senior Currency Strategist at Market Traders Institute, has recorded a short video where he shows how one could trade the anticipation and confirmation levels on a live chart. Click here to watch this timeless lesson from Chris. >>

To discover such simple to apply, time-tested, and potentially profitable Forex strategies, you can download our FREE ebook and know how you could avoid some critical trading mistakes that almost every trader has made. Click here to know more >>

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