A Comprehensive Guide to Trend Lines Strategy

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Contents

Trading with Trend Lines: The Trend Breaker Strategy

I have developed a new Trend Breaker Strategy that simple and yet easy to understand. In this article, I will teach you how to draw trend lines correctly, trendline breakout confirmation, trendline trading strategy secrets, 4 keys to profitable forex trend trading, and many more key elements to trading. This strategy may also be used with accuracy when day trading trend lines. We are going to have all the top trend line trading tips inside this article. We also have training on Trend Line Drawing with Fractals.

This trendline breakout trading strategy uses three indicators, which are the following:

  1. MACD– The inputs for this indicator are: Fast Length= 12 (represents the previous 12 bars of the faster moving average), Slow Length= 26 (Represents the previous 26 bars of the slower moving average), and Signal Smoothing= 9 ( represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines called a histogram).
  2. Simple Moving Average– The inputs for this indicator are: Length 8, Offset 0. (Red line )
  3. Exponential Moving Average-The inputs for this indicator are: Length 20, Offset 0. ( Blue line )

This Trend Breaker strategy also uses three different time frames. They are the 4 hour, the 1 hour, and 15 minute time frames. This top-down approach uses these time frames to identify a trend, find a breakout point, determine an entry point, and execute the trade. You can also read about the Trader Profile Quiz.

Let’s get started.

Step One to trend line trading: Identify a trend

The first thing you need to do is identify an upward, downward, or sideways trend by switching to a 4-hour and 1 hour time frames. The reason both are used is that it will give you the best perspective in determining a trend according to this strategy. Draw a trend-line so that 3 points of resistance or support was touched. We created this trendline trading system so that you could easily enter trades without a lot of guesswork on your part. Here You can see a funny video about trading levels.

Since this strategy focuses on trends, a trend line will be drawn on the support or resistance lines of the trend. The criteria for a trend is that there need to be at least three points of resistance or support.

As you can see on the 4- hour time frame below this clearly is a downtrend.

Below is the same chart only this is a 1-hour time frame. This is just to get another perspective of this downtrend. It is good to do this to completely confirm this trend by identifying 3 levels of resistance. Trading with trend lines is not easy, that is why it is important to have a clear system of step by step rules to make it easy for you to follow.

Step Two: Identify a Breakout point Trendline Trading System

In order to find a breakout point of the trend that was identified in step one, the strategy will use a combination of the three indicators (MACD, 15 minute SMA, EMA) to identify a break out on the 15-minute time frame. This time frame is used because a trend was already identified in step one on the 4 hours and 1 hour time frames.

As you can see in the chart above on the 15-minute time frame, the MACD lines were crossed. When the crossover of the fast length and slow length occurs, this will signal a new trend. This gave an indication that a trend was breaking. The moving average and exponential moving average lines also crossed. So when the MACD lines cross and the simple moving average/ exponential lines cross wait until the candlesticks go above/below trend line that was drawn in step one, then identify a point of entry into the trade. One of the reasons we like trend line trading so much is that it is straight forward and simple and we recommend all traders have something simple.

So looking at our example above the criteria was met to go to step three because the SMA and EMA crossed and the MACD lines crossed. Also, the trend went upwards and hit our trend line. This is a signal to go to step three.

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If neither of the indicators crosses before the candlesticks close and hit the trend line then do not go any further because the trade does not meet the criteria of the rules. The indicators need to show that the trend broke before it touched the trend line.

Note* When our indicators are crossing, the trend needs to be heading toward the trend line that was drawn in step one. This is because the trend is breaking and a breakout is about to occur. When the breakout happens we will discuss when to make an entry.

Step Three: Trend Line Trading Identify a point of entry

Here is a list of the entry criteria:

These 4 things must happen to enter a trade with this Trend Breaker Strategy.

  1. Simple Moving Average Must Cross below the Exponential moving average.
  2. Macd Must Cross
  3. The price must break below or above the trend line.
  4. After the break of the trendline, you must wait for 3 candles to close on the 15-minute chart before taking your entry.

Now we need to identify a point of entry. To identify a point of entry always use the 15 minute time frame in this strategy.

So in our example below, we see that there is an obvious stand-off between buyers and sellers on the trend line.

Once there are at least three candlesticks above or below the trend line, you execute the trade.

In this example, there are three candlesticks that fell above the trend line after our indicators signaled that the trend was broken. At this point, you want to make an entry. Also, read about Trader’s Tech and Installing MT4 EAs with Indicators.

Once your entry point has been determined then you can place a stop loss.

Step four: How to Trade with Trend Lines: Determine where to place a stop loss

Place a stop loss past the last support and resistance levels in the trend itself. Again, use the 15 minute time frame to find this point of resistance/ support level.

In the example shown below, place the stop loss below the last support level. This will ensure that if there was a bearish move, it will hit the last point of support and make a bullish move upwards.

You can clearly see that there are two levels of support in the above example. Use the support levels to determine the stop loss. The rules were to place the stop loss below the last support level which is why you see the stop loss below these levels.

Step five: Trendline Trading System Exit Strategy

The plan clearly identified a trend, a breakout point, point of entry, and determined a stop loss. The final step is to determine the exit point. This Trend Breaker strategy uses 1 risk to 3 reward ratio.

What that means is you have the potential to make 3 times more than you are risking.

To do this you, the first thing that needs to be done is identifying how many pips there are from your entry point to your stop loss. So let’s just say you had 24 pips in between these positions. Since we are using a 1 risk to 3 reward ratio, we would simply multiply the number of pips in between the stop and entry by 3. This would give us 72.

So 72 pips would be the target number for that trade.

As you can see in the example below, the target was hit with a gain of +72 pips!

The rules were followed, the ratio of a risk of 1 to 3 reward was put in place, and the trading strategy worked to perfection! Here is the trend line trading youtube video we have produced to help you follow the strategy easier.

This Trend Breaker Strategy is simple and yet effective. There is no need to stress and worry that you made the wrong trade. You follow the rules and do not let anything else make you back out of a trade. If it follows the rules, execute the trade with confidence.

Always remember to only be risking no more than 2% of your account!

This will help you identify daily trends and points where they break. There is no need to force yourself into a trade. If it does not follow your rules and guidelines then search for another pair to trade. Feel free to check out one of our other trading strategies. Tap here to learn the Fibonacci Trend Line Strategy.

If you thought this strategy will work great then go ahead and check out the Free Report To this Strategy!

This full report will show you detailed information about this strategy and why it works so well. It will also show you more examples of this strategy. Get the Trendline Trading Strategy PDF.

Check it out now while it is completely FREE.

Please let us know if you have any questions at all about Trend Breaker Strategy!

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How to Draw Trend Lines on a Stock Chart – Like a BOSS

Knowing How to Draw a Stock Chart Trend Line is Critical To Your Success in Stock Trading -Learn How in Our Starter Starter Guide with 5 Examples

Before we start to draw trend lines we need to understand:

What is a Stock Price Trend?

If someone asked you today, “Is the stock market in an uptrend, downtrend or a lateral consolidation”, what would you answer?

Knowing the answer to this key question is important for the stock market or even an individual stock. Why?

If you buy a stock (go long) in an uptrend you are more likely to make money on it. There is a simple way to see for yourself if the market is heading upwards or downwards.

First let’s examine what types of trend exist:

Types of stock price trend:

  • Uptrend: The stock or index is moving up, making new highs or higher highs
  • Downtrend: The stock or index is moving downwards making lower lows
  • Sideways consolidation: neither making significant new highs or new lows

There are also time-frames to consider in evaluating a trend, for this we will refer to Charles Dow’s classification in Dow Theory.

Types of Stock Trend Time-Frames:

  • Short Term: Days to weeks
  • Medium Term: Weeks to months
  • Long Term: Months to years

By combining the above terms, you could be specific about the market trend. For example, you could say the market is in a short-term up-trend, but a long-term down-trend. But isn’t that contradictory, the market being in both an uptrend and a downtrend at the same time?

Not really it makes perfect sense.

The Following Examples are an excerpt from the Liberated Stock Trader Academy Book and Training Course. Chapter 7, Section 2.

Drawing trend lines is one of the most important skills of technical analysts, trend lines represent important areas of support and resistance. Once you have this skill, charts come to life and start to signal their message to you.

Example 1 — 4 Steps to Drawing your First Trend Lines — UpTrends

Example 1. Drawing UpTrends

  1. To evaluate an upward trend draw a line joining the highest highs
  2. For the floor of the uptrend draw a line connecting the lowest lows. The price here bounces 3 times off the bottom line but then proceeds higher.
  3. A trend line is drawn to show that price has moved strongly past the previous high this is a BUY Signal at $35.50.
  4. Finally t,he price is exhausted and falls through the bottom resistance line at $51. This break of the upward support line is a sell signal.

Quick Tip: The more bounces off a trend line the stronger the trend.

Buying and selling based on the trend lines shown here would have bagged you a 49% win. Alas, life is never that easy and showing this in retrospect does mean we have the benefit of hindsight.

Example 2 — Drawing Support & Resistance Trend Lines

It is very important you practice drawing trend line as much as possible, after a while you will get used to it and it will become second nature.

Here is another example of how to draw trend lines. This is a chart of Ticker: AAPL Apple Inc. it shows how to draw trend lines in a downward price move and an upward price move.

Practice drawing trend lines Ticker: AAPL Apple Inc

Notice that the trend line above the price is called resistance and the trend line below price is called support. When price breaks up through resistance it moves higher, this could potentially be a buy signal. When the price breaks down through the support trend line it moves lower, this could potentially be a sell signal.

Quick Tip: The longer the trend line is in place or acts as support or resistance, the stronger the trend and the bigger the move when the trend line is broken.

Look again at the chart of Apple Inc. See how Apple was in a sideways consolidation from 2001 through to 2004. When it eventually broke out of that channel upwards through resistance the stock took off making over 1600% gain.

Chapter 7 of the PRO Training delves deeper into the technical analysis to enable you to make Buy and Sell decisions using trend lines, spot the most important patterns and trends, discusses the important of Price Gaps, Triangles, and Wedges.

Example 3 — How To Draw Trendlines — Video Seminar

Example 4. Drawing Trend Lines to Recognise Stock Chart Patterns

If you cannot draw a Trend-line you should not invest in the stock market!

In this example, we will examine how to look at price movement and use it to evaluate the stock.

Price is known as the most important indicator and so it should be when it boils down to it the most important thing is the price.

Here we can see a chart of Broadcom (BRCM), one of the darlings of the tech bubble in 2000.

Where will you draw the trend lines?

Take a look at this Stock Chart, where would you draw the Trend Lines?

Take a moment to think about where you would draw the trend lines before you scroll down to the chart where I have drawn them.

Broadcom Chart with Support & Resistance and a Double Bottom Pattern Trendlines

A chart can really come alive when we add trend lines. The graphic below shows BRCM, with trend lines, superimposed.

Follow This Process to Draw the Trend Lines

  1. Starting from left to right we see from mid-April to July, the stock starts to move in a sideways pattern, known as “Channeling” .
  2. The two red lines show the “trading range” ; this is the range between which the stock price fluctuates.
  3. The upper line is known as the Ceiling or the “Line Of Resistance”, and the lower the Floor or “Support” . Both lines show where the number of sellers equals that of buyers.
  4. When the stock price falls through the support line it means the trend has changed, and new market impetus has affected the stock. If you owned this stock in April and enjoyed the corresponding price rise this break would be a strong “Sell Signal” to the trained eye.
  5. The stock consequently dropped in 2 days, but also had the good courtesy to rise again over the following month to give anyone slow on the uptake another chance to Sell. It broke through the previous support line, but was not strong enough to make it to the upper ceiling of the channel. If you had not got out this time you would have suffered a punishing 50% loss. Enough to make a grown man weep!
  6. The next significant point to note, is in mid-October, when the stock bounces at about $13, clearly oversold and proceeds to make a very nice looking “Double Bottom” or “W” bottom.
  7. Chartists the world over recognize the double bottom and those that like to buy on Bottoms would have done. This clearly happened as the stock moved up 38% in 3 weeks.

Example 5 — Using Trend-lines to make Buy and Sell Decisions — 4 Steps

So we have seen the Sideways Channel and the W bottom. But how do we know when a stock is going to take off?

The truth is we never really know.

All we can do is make judgments based on what we see. Do not forget w e are only buying Stocks of companies that have

  • Excellent Earnings per Share
  • Strong acceleration in the growth of Earning per Share
  • Excellent Revenue growth

So we are in essence giving ourselves a great head start and reducing our overall risk.

4 Step Guide to Using Trend Lines for Buy & Sell Decisions

4 Steps to Draw the Trend Lines on the Chart

  1. To evaluate an upward trend draw a line joining the highest highs
  2. For the floor of the uptrend draw a line connecting the lowest lows . The price here bounces 3 times of the bottom trendline but then proceeds higher. The more bounces off a trend line the stronger the trend.
  3. A trend line is drawn to show that price has moved strongly past the previous high, this is a BUY Signal at $35.50.
  4. Finally, the price is exhausted and falls through the bottom resistance line at $53.

Buying and selling based on the trend lines, here, would have netted you a tasty 49%.

Alas, life is never that easy, and showing this in retrospect does mean we have the benefit of hindsight. This is why the finest minds of Wall St. have a whole host of other technical indicators that accompany price to enable you to assess trend quality. These will be discussed in other chapters.

There are still other very important lessons to learn.

Do you want the knowledge to invest with confidence?

Buy the Liberated Stock Trader PRO Training Package and receive 16 hours of video lessons and the Liberated Stock Trader Book – fast forward your future.

Guiding you through the maze of stock market investing to give you a uniquely practical and comprehensive knowledge of the 4 Pillars of Success

FUNDAMENTAL ANALYSIS – Learn how to analyze the health of the business climate and how to find great companies using our practical stock screening guide.

TECHNICAL ANALYSIS – Chart Reading is not Voodoo, it is science. YOU will gain an incredible understanding of expert charting techniques, covering the most important methods, indicators and tactics, to enable you to time your trades to perfection.

MONEY MANAGEMENT – Understand how many stocks to buy, when to buy them, how much to invest and when to sell using expert stop-loss strategies.

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  • The Liberated Stock Trader eBook – Over 200 pages of workbook covering every lesson
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Other Chapters of the Liberated Stock Trader Book are listed below

This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics

This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.

What are stock market cycles and the cycles of business and economies. Important information that you need to appreciate as part of your core analysis.

Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.

Stock screening means using criteria to short list the kind of stock that you want to purchase. A vital part of any stock market training

Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis helps with.

Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last. Vital for you to establish buy and sell signals.

Which indicators should you use, there are literally hundreds of stock chart indicators. Each have a specific use case and application, which should you use?

Volume is a vital indicator along with price. Both of these you need to understand in granular detail, you will learn everything you need to know.

Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.

How are the market participants feeling? Positive, Negative or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Lean how to use them to your advantage.

Understanding how you want to invest, how much time you have and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.

Trendline Trading Strategy – How use Them

Binary options trading is an extremely interesting but also difficult job.
A trader participating in the binary options industry at least must equip himself with the minimum trading knowledge, otherwise, he will be wiped out sooner or later. Knowing how to define trending market conditions without using repainting indicators is a must amid the minimum technical reading knowledge.
If you haven’t know about it, this article will guide you how to determine a trendline using just manual drawing..

What Is a Trendline?

How to use trend lines?

After determining a trending channel, your next work is to take advantage of it. Luckily, trends appear in any trading time frames and on any financial assets, including currency pairs.
Buying opportunities are present when prices approach the lower trend line of an uptrend and tend to rebound from it.

If you like this strategy, you might also be interested in this Darvas Box Trading Strategy

Conversely, selling occasions are determined when prices approach the upper trend line of a downtrend and tend to bounce from it.

Bullish entries also appear when a downtrend is breached. On the contrary, bearish signals are present when an uptrend is broken.

There are some important entering rules when trading with trend lines:

  • Only one position should be opened at a time;
  • The pump candlestick must be fully close before a signal is confirmed valid;
  • In a bullish trend, only buying signals are traded except the trend is broken. Similarly, only selling occasions should be traded in a bearish trend, except the trend is breached;
  • The expiry time should be established 6 times larger than the trading time frame. For example, you can set the finishing time to be 6 hours when trading on the 1-hour chart.

Pros and cons of using trend lines to trade

  • Easy-to-use, general-purpose;
  • Generating highly accurate trading opportunities;
  • Enabling traders to grab a string of signals from long trends.

Cons:

  • Requiring a high level of patience;
  • Requiring a proficient technical analysis level.

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