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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:
- 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).
- Simple Moving Average– The inputs for this indicator are: Length 8, Offset 0. (Red line )
- 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.
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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.
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.
- Simple Moving Average Must Cross below the Exponential moving average.
- Macd Must Cross
- The price must break below or above the trend line.
- 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.
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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.
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4 Trading Strategies For The Trend Line Tactician
By Galen Woods in Trading Setups on January 3, 2020
Price action traders can’t do without their trend lines. Trend lines are practical tools for tracking and trading trends. It makes sense to form trading strategies with this simple but useful tool.
Many traders who seem to trade with a blank chart have in fact internalised the art of trend line drawing. They can visualise the trend lines with actually drawing them.
Trend lines track trends. And when it comes to trading trends, you can go for retracements or reversals. You can work on the premise that the trend will continue or reverse.
You can classify the four trading strategies below with this understanding.
- Trend Line Bounce – Aggressive Retracement
- Minor Trend Line Break – Conservative Retracement
- Major Trend Line Break – Aggressive Reversal
- Major Trend Line Break and Retest – Conservative Reversal
Here are the four trading strategies in detail.
#1: Trend Line Bounce (Aggressive Retracement)
A trend line bounce is a classic pullback trade.
The price action premise here is that the trend (as highlighted by the trend line) will resume.
A bull market will bounce up from a trend line. Likewise, a bear market will find resistance and bounce down from a bearish trend line.
There are two approaches for this trading strategy.
The more conservative method is to wait for a confirming price pattern to form. An example is shown below.
The more aggressive method is to enter wit a limit order once price hits the trend line. It allows you to enter at a better price if the trend does resume. However, as it lacks confirmation, its probability of success is generally lower.
If you use a limit order to enter, consider using a volatility stop-loss.
#2: Minor Trend Line Break (Conservative Retracement)
In this context, you are looking for a minor trend line that goes against the trend.
The beauty of this trading strategy is that it uses a single trend line for two purposes. The same trend line defines the retracement and triggers the trade.
As shown in the example above, this trading strategy leads us into the market on the side of the major trend. The trigger is the break of the minor trend line.
Let’s drill into the specifics of the trigger. There are several definitions of a trend line break. To use it as an effective trigger, you must know which one you want to use.
You can consider a trend line broken when:
- The market trades through it
- The market trades through it by a certain price threshold
- A price bar closes beyond it
Waiting for a price bar close to confirm the trend line break works well. But there’s a drawback. In volatile markets, you might not be able to enter before the trend pushes to a new extreme.
This trading strategy is conservative because it requires a minor trend line to form against the current trend.
For that to happen, a more complex retracement must be present. At least, it must be a two-legged retracement.
However, the aggressive and conservative labels for retracement trades are not absolute. It depends on the actual price action and the way you draw your trend lines.
It is possible that a trend line bounce setup is a more conservative strategy. For a retracement trade, the guideline is that the deep retracements mean conservative trades.
(Note to Day Trading With Price Action Course students: The minor trend line here is not the default trend line drawn with valid pivots. As we are looking to trade the failure of these minor trend lines, make an exception and use basic pivots to draw them.)
#3: Major Trend Line Break (Aggressive Reversal)
A major trend line tracks the trend. Thus, when it is broken, it is a technical reversal signal.
The chart above shows a great example.
While it might suggest that this strategy is perfect, it is far from it. In fact, the trend line tracking the market had been broken many times without reversing.
Established trends seldom reverse sharply without any other signals. Usually, you will find climatic volume and price movement before a sharp reversal. Use these signals to augment this trading strategy.
You can also use divergences or other reversal trading tools with this trading strategy.
The key point is that it is an aggressive reversal trading strategy. Don’t use it in isolation.
#4: Major Trend Line Break And Retest
In this trading strategy, we don’t go short once the trend line is broken. Instead, we give the market a chance to resume the trend. If it cannot do that, then we enter into a reversal trade.
This is why it is a more conservative strategy.
Let’s see how it works in the chart below.
What you want to see here is an inability of the market to rise above the broken trend line. If a broken bullish trend line resists the market from rising higher, a reversal is likely.
Thus, here, a close examination of the price action upon the retest is pivotal. In the chart above, the prior sideways action and the rejections from the trend high are telling.
Taken together, they show that the market has difficulties resuming the bullish trend. Hence, a reversal trade is sensible.
Sharp reversals are possible but unlikely. When you catch them, your reward is huge and comes swiftly. But if you are patient and are willing to skip the sharp reversals, this retest strategy is for you.
Conclusion – Trend Line Trading Strategies
Experienced discretionary price action traders will find that these strategies are all they need.
These four trading strategies are far from perfect. But they provide a basic template for building your trading strategy.
For any trading strategy to work, you must be consistent. Do not draw trend lines in a haphazard manner. Stick to a set of clear rules for drawing your trend lines.
All trend lines in this article are drawn with objective rules taught in my trading course. You need not use the same rules, but stay consistent with your chosen method.
Fibonacci Trend Line Strategy – Simple Fibonacci Trading Strategy
I am going to share with you a simple Fibonacci Retracement Trading Strategy that uses this trading tool along with trend lines to find accurate trading entries for great profits.
There are multiple ways to trade using the Fibonacci Retracement Tool, but I have found that one of the best ways to trade the Fibonacci is by using it with trend lines. We also have training on Trend Line Drawing with Fractals.
The Fibonacci Retracement tool was developed by Leonardo Pisano who was born around 1175 AD in Italy. Pisano was known to be “one of the greatest European mathematicians of the middle ages.”
He developed a simple series of numbers that created Fibonacci ratios describing the natural proportions of things in the universe.
These numbers have been used by traders now for many years!
With this Fibonacci trading strategy, you will learn everything you need to know to start trading with the Fibonacci Retracement tool. You’re going to find out the Fibonacci meaning, Fibonacci algorithm, Fibonacci biography, the Fibonacci formula for market trading, Fibonacci series algorithm, the Fibonacci sequence in nature, along with many other useful facts about this great tool!
Below is a picture of the different ratios that Leonardo created. We will get into detail later on as to which of these lines we will use for our trading strategy.
Your charting software should come standard with these ratios, however, you are the one that puts them on your chart. Many traders use this tool which is why it is important to have a trading strategy that incorporates this. You are going to need to know where to apply these fibs. You will need to place them on the swing high/swing low.
A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.
If you are unsure of what that means let’s take at a chart to see what this looks like:
So here is what it would look like then on your chart with the Fibonacci Retracement:
Here’s a quick way to remember this concept. If it’s an uptrend, you want to start with the swing low and drag your Fibonacci level all the way up to the swing high. If it’s a downtrend, you start with the swing high and drag your cursor all the way down to the swing low. You can also read the strategy on how to use currency strength for trading success.
Simple enough. Let’s go ahead and look at all we will need with this trading strategy:
Trading Tools for Fibonacci Trend Line Trading Strategy
1. Fibonacci Retracement
2. Trend lines
This trading strategy can be used with any Market (Forex, Stocks, Options, Futures).
It can also be used on any time frame. This is a trend trading strategy that will take advantage of Retracement of the trend.
Forex traders identify the Fibonacci retracement levels as areas of support and resistance. Because of this, these levels are watched by many traders which is why this strategy could be a difference-maker to your trading success.
Since we know some information about the Fibonacci Retracement let’s look at the rules of the Fibonacci Trend Line Strategy.
Rule #1 – Find a Trending currency Pair
This is simple enough. We need to make sure it’s either an uptrend or a downtrend.
In the example, we will be using today this will be an uptrend. We will be looking for a retracement in the trend and then make an entry based on our rules.
Rule #2 – Draw a Trend Line
Since you identified already that it is in fact trend by looking at your chart, now you need to draw your trend line.
Draw this on the support and resistance levels as the trend is going up or down.
Once you draw this trend line you are good to move on to the next step.
Trend lines are a key component to trading and I always recommend using them when you can.
Rule #3 – Draw Fibonacci From Swing low to swing High
Now you can get you Fibonacci Retracement tool out and place it at the swing low to the swing high.
Remember this is an uptrend so we started at the swing low 100% and placed the second 0% level at the swing high.
Rule #4 – Wait for the Price level to Hit Trend Line
So far we found a trending currency pair, drew a trend line to validate this, and placed our Fibonacci at the swing low and swing high.
This rule is the critical step to the strategy so you need to pay close attention.
Because we need the price moves to hit our trend line, stall, and go back in the direction of the trend.
If it breaks the trend line and keeps going and blows past the 50%, 61.8%, 78.6%, then the trend is obviously broken and you need to look elsewhere because a trade with this strategy would be invalidated at that time.
With that being said let’s look at our chart and see what happened.
Great, it hit the trend line so why can’t we just go ahead and BUY now since it is an uptrend?
Well if you asked that, good question.
As I said, the market tends to follow these lines, but sometimes it will fake traders out and they will end up losing a lot of money when it breaks the trend.
This happens every single day, which is why it is critical to have a strategy that will help you know if this break may occur.
And we do not want any of that to happen to you, so let’s check out the criteria to enter to help us make a safe entry.
Rule #5 – Price Must hit trend line in between 38.2% and 61.8% lines(Fibonacci golden ratio)
Before I start to explain, look at the chart to see what this exactly means:
The price retraced all the way back and tested the 38.2 mark for quite a while before hitting the trend line and continuing to go to the upside.
Once the price hit the trend line that we drew, we saw that it was in between 38.2-61.8 lines, and then our trade was one step closer to being triggered.
Why does it have to be in-between these lines for this strategy?
We want to capitalize on the big retracements. And the 38.2, 50, 61.8 lines have all been proven to be the best retracement lines to use with the Fibonacci.
Once you find this, look for an entry.
Rule #6 – Entry Point
So everything is lined up to make a great profit on this retracement, what is the last step to make the trade?
In a BUY-In order to make your entry, you will wait for the price to close above either the 38.2% or 50% line.
In a SELL-In order to make your entry, you will wait for the price to close below either the 38.2% or 50% line.
Let’s check out the charts to clarify this:
Refer back to this picture when you use this strategy. This shows us what our charts will look like before we make a trade.
*Note: If the Price hit our trend line in between the 50% line and the 61.8% fib line, then we would wait for a candle to close above the 50% line to enter the trade.
The only reason to wait for a candle to close above the 38.3% fib line is because it is in between the 38.2%-50% lines for this example.
This process should not take very long, as our trend should continue upwards because of the previous support level with the trend line.
In the above example, it illustrates these rules when the trend line meets the price level in these two zones.
*Note: If the price breaks below the 61.8% fib level in the example, then you will also need to wait for a candle to close above the 50% fib level.
The reason you always wait is because you do not want to get caught in a broken trend and end up getting stopped out.
Rule #7 Stop Loss Placement
Your stop loss can vary based on what your charts are showing you. Look in the past for prior resistance or support.
In the example trade, the stop was placed in between the 50% and 61.8% fib line. For this trade, it just made sense because if it would have broken the 50% fib line, then the uptrend would have been invalidated. We want to get out of that BUY trade as quickly as possible.
It is always helpful to look in the past to determine a stop loss.
You always want to push you winners. If you entered this trade using this strategy here are some of the returns you could have gotten is just a short period of time:
Which is why I would recommend using a 3 to 1 (or even 4 to 1) risk to reward ratio. If you want to see the best strategies that this R:R ratio check out some of these: Supply and demand strategy, Stochastic strategy, Big Three Strategy.
That is always up to you. You need to decide how much you are willing to risk vs. reward.
Some will go for just 20 pips, while others press their winners and usually end up profitable.
I would target a point where there is prior resistance/support or an area where you think the trend will stop.
You could even draw channels to help you find a good take profit mark.
Be smart and remember to only risk no more than 2% of your trading account.
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Many people search for the best Fibonacci trading books, the best Fibonacci trading youtube strategy, Fibonacci trading software, and the best Fibonacci strategy in forex. But really there is nowhere else to search because all those things you can find in this article!
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