In this article, Tad DeVan takes us through a strategy using inner and outer trendlines and how they can provide traders with a sense of upcoming market direction. In this lesson, you’ll learn more about the important relationship between trendlines on the chart.Tad is a Senior Forex Analyst for Market Traders Institute and host of the Ignite Trading Room. Ignite Trading Room is FREE to join for active SmartTrader users. CLICK HERE to join today >>
The market has been on a rollercoaster ride lately. But astute traders are noticing something interesting – Momentum and trend-trading has sustained in small pockets of the market and there’s a huge profit potential to trade it.
This shouldn’t surprise old time traders. Even in the middle of gloom and doom, there are always some market trend opportunities that do well.
So, let’s talk about one such trendline strategy you can follow to interpret the market direction and potentially profit from it…
Here’s a quick refresher on trendlines:
Trendlines are one of the most common forms of technical analysis trading. They are widely used by traders for predicting the entry and exit timing of a trade.
As the name suggests, trendlines are nothing but the lines that are drawn on a chart along a trend to represent either support or resistance levels. And understanding these trends – uptrend, consolidation, and downtrend – goes a long way in implementing a well-designed trading strategy.
Types of Trendlines
When the price is rising, connecting the lows with a line gives you an ascending trendline. This is called an ‘uptrend’ or an ‘inner trendline’.
Inner trendlines act as a support level indicator. As long as the price is above the trend line, the uptrend is considered intact.
On the other hand, when the price is falling, connecting the falling high levels with a line gives you a descending trendline – which is also called a ‘downtrend’ or an ‘outer trendline.’
Outer trendlines act as resistance level indicators and as long as the price is below the trendline, the downtrend is considered intact.
Here’s how these may look on your chart:
Inner Trendline on RHS and Outer Trendline on LHS
With that, let’s go over how you can set up trades with these trendlines…
Trading the Inner Trendline
Let’s take the uptrend or inner trendline as an example to understand this.
We will see the price rising to higher highs in this case. Draw a line at two or more of the low price levels of this rally and you have an inner trendline (the blue line in the image below).
To trade this, look at the level when the inner trendline breaks through the price and stretches out as an outer trendline. In this case, the price has a tendency to move in the direction of the outer trendline.
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 can expect the price to move in the direction of the ‘outer trendline’ and can choose to trade it for potential profits.
Trading the Outer Trendline
In the case of outer 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.
To trade this, look at the level when the outer trendline breaks through the price and stretches out as an inner trendline.
In this case, the price has a tendency to move in the direction of the ‘inner trendline’. And based on this analysis you can set up your trades accordingly.
So, those were two simple yet effective ways in which you can read the relationship between inner and outer trendlines and use them with price action to try and capture some potential profits.
Do check them out the next time you’re on your charts!
Tad has also recorded a short video on this concept, which you should WATCH HERE >>
To discover such simple to apply, time-tested, and potentially profitable Forex strategies, you can download our FREE ebook to learn how you could avoid some critical trading mistakes that almost every trader has made. CLICK HERE to know more >>
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