Trend Lines Trading Strategy – Learn how to Buy Low and Sell High

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Trend Lines Trading Strategy – Learn how to Buy Low and Sell HighUsing trend lines in trading implies that you are waiting for the price of a particular instrument to rise to a certain level of which you know the market will surely bounce. You have to keep in mind that the market can react in the following different ways:

  1. The market on the trend line can bounce off, that is, it can maintain the trend.
  2. The market can push through the line, change the trend and create a new, opposite trend line

It is important for every trader who wants to fully utilize the trend line strategy to first learn how to correctly draw trend lines.

How to draw trend lines and how to improve?

At least two points are needed to draw a trend line. For an upward trend, there have to be at least two swing lows in the market. For a downward trend, the market must produce at least two swing highs.

The figure below shows the graphic explanation of how an upward trend line is drawn:

Some traders may find it easier to draw a trend line on a line chart (like on the one above), where a trend line marks and connects the swing points.

A trader can also change to a candlestick or a different kind of chart and draw a yellow parallel line, from the first swing low. At the point where the price hits the trend line, we can either sell or buy depending on whether the trend line is showing an upward or a downward trend.

This strategy does not require any indicators, but you can only benefit from it if you know candlestick patterns because they can warn you ahead of time about a changing trend.

 

Figurative representation of the illustrative potential trading opportunity:

1) Draw a blue trend line

2) Draw a yellow trend line

3) Hit the blue trend line and a likely entry signal.

4) Place a Stop-Loss order 1-2 pips under the current value of the yellow trend line.

5) Place a Profit-Target order at the level of the highest close candlestick of the previous swing

 

Buying rules:

  1. Draw an upward trend line – with at least two lows as more lows indicate a stronger trend.
  2. Wait for the price to hit the trend line and never buy unless it is hit!
  3. After the price hits the trend line and the market bounces off, you can enter a long trade.
  4. You can place a Stop-Loss order 1-2 pips under the yellow trend line.
  5. You can place a Profit-Target order at the top of the nearest previous swing.

Selling rules:

  1. Draw a downward trend line with at least two highs.
  2. Wait for the price to hit the trend line and never buy unless it is hit!
  3. After the price hits the trend line and the market bounces off, you can enter a short trade.
  4. You can place a Stop-Loss order 1-2 pips above the yellow trend line.
  5. You can place a Profit-Target order at the bottom of the closest previous swing.

The disadvantages of trading trend lines

  • There can be a change in the trend after a trend line has been pushed through.
  • The market may follow the trend line but fail to hit it.
  • After a while, the market may create corrections of the trend line and change its slope. The trader needs to have experience and respond to the situation by redrawing the trend line.

The advantages of trading trend lines

  • It is based on Price Action.
  • There is a very high profit/loss ratio in some cases.
  • The trader can often buy at the market low and sell nearly at the top of the market when removing flaws.

The graphic example of the Price Action strategy will definitely provide an inspiration to you as far as approaches to trading are concerned.

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