One of the most powerful analysis tools used in forex trading are trendlines.
You have two types: upward sloping trendlines and downward sloping trendlines.
This strategy shows you how to trade trend reversals using violated (broken) trendlines for both long and short entries including stops and price objectives.
1. Understanding the basics
Upward sloping (rising) trendlines connect at least 2 support points while downward sloping (falling) trendlines connect at least 2 resistance points on the chart. See illustration below.
Recommended Time frame(s): 1 Hour chart and above
Trading sessions: All
Currency pairs: All
Entry for long trades:
#1 Find and place a downward sloping trendline
#2 Wait for a close above the trendline
#3 Open BUY trade
#4 Place protective stop below the breakout bar
#5 Draw an upward sloping trendline as the uptrend develops
#6 Price objective: Exit the trade when the price closes below the upward sloping trendline
Example trade: EUR/USD 4 Hour Chart (click the chart to enlarge)
Entry for short trades:
#1 Find and place an upward sloping trendline
#2 Wait for a close below the trendline
#3 Open SELL trade
#4 Place protective stop above the breakout bar
#5 Draw a downward sloping trendline as the downtrend develops
#6 Price objective: Exit the trade when the price closes above the downward sloping trendline
3. Trade Results (see chart above)
The first sell trade (1.3293) with protective stop loss at 1.3412 was closed at 1.2974 for 319 pips.
The second buy trade (1.2974) with protective stop loss at 1.2841 is still open.