today I will reveal
everything you need to know about how to trade using trend lines so what you'll
learn from this article is first how to actually draw them properly and second
how you can utilize the trend lines to find high probability trade setups so
without further a due let's get on what are trend lines so trend lines are
simply key levels that are formed in a trending market and the reason we draw
them is because usually when the price approaches these key levels it can offer
you multiple high win rate trade opportunities for example in a trendline
strategy there are two types of patterns that may form when price approaches a
trendline the first pattern is called the continuation pattern which is formed
when the price bounces back to the direction of a trend right after hitting a
trendline and the second pattern is the breakout pattern which is formed when
the price broke out of a trend line causing the trend to switch directions now
remember just because the price hits the trend line doesn't guarantee that a
trend change will occur you need to use additional price action techniques to
confirm your analysis
which I will discuss later in the article so now I'm going
to show you a simple way of drawing trend lines effectively one of the most
common questions that beginners ask when drawing trend lines is should you draw
them hitting the wick's end the candles close or the candle's body well the
answer is you want to draw them where it can get you the most amount of touches
as possible let me give you an example in this chart we spotted a current
uptrend as prices made higher highs and higher lows now because this is an
uptrend it means you want to place your trend line below the trend then you
want to adjust the trend line to get as many touches as possible now notice
that there are some points that are overlapping the trend line and even some
that are not touching the trend line at all which is perfectly fine because
remember a trend line is supposed to be treated as a general area just like
support and resistance so
let's look at another example here we spotted a current
downtrend as prices made lower highs and lower lows and because this is a
downtrend it means you want to place your trend line above the trend and again
you adjust it to get as many touches as possible and so it's that simple so now
that you know how to draw trendlines effectively it's time to go in-depth into
how you can utilize these trendlines to find high probability trait setups so
first, let's start with the continuation pattern which is a pattern that occurs
when the price bounces back to the direction of a trend right after hitting a trend
line now remember you cannot immediately take a position just because the price
hits a trend line you need to use other price action techniques to confirm your
analysis and a good technique that you can use to confirm a continuation
pattern is by drawing a mini-trend line right at the pullback the next step is
to wait for the price to confirm the continuation pattern by waiting for it to
break out of the mini trend line once the pattern was confirmed you take a buy
position
let's look at another example in this chart we spotted a
downtrend and so we place our trend line above here then as we look at the
current price we spotted another possible continuation pattern so the next step
is you want to confirm the continuation pattern by drawing a mini-trend line at
the pullback and once the price broke out you take a sell position now another
indicator that can also help you confirm a continuation pattern is the
stochastics here's how the strategy works in this chart we spotted a current
uptrend and so we place our trend line below it now as we look at the current
price we spotted a possible continuation pattern as price hits the trend line
and at this point notice that the stochastics is at the oversold level and so
you want to utilize the stochastics to help us confirm the continuation pattern
by waiting for it to cross back inside the oversold level once the pattern was
confirmed you take a buy position
let's look at another
example in this chart we spotted a downtrend and so we place our trend line
above the downtrend next as we look at the current price we spotted another
possible continuation pattern as price hits the trend line while the
stochastics is at overbought and so we want to wait for the stochastics to
confirm the continuation pattern by waiting for it to cross back inside the
overbought level and once the pattern was confirmed you take a cell position
now moving on to the second pattern which is called the breakout pattern this
pattern forms when price broke out of a trendline causing the trend to switch
directions so again you cannot take a position just because the price broke out
of a trendline because it doesn't guarantee that a trend change will occur you
still need additional confirmation to avoid false breakouts and one of the ways
you can do this is by looking for signs of momentum loss before the breakout
let me give you an example in this chart we can see that the
price is on an uptrend and so we draw our trend line here now you can see that
the price were making higher highs however when we looked at the latest price
action the price suddenly made a lower highs instead what this means is that
buyers failed to push the price higher which is a sign of momentum loss then we
saw that the price broke out of the trend line which further confirms the trend
change so this is a good opportunity to take a sell position let's look
at another example here we spotted a downtrend and so we place our trend line
above it now notice that the price was making lower lows before suddenly it
made a higher lows instead indicating that a downwards trend was losing
momentum then we saw the price broke out of the trend line which again further
confirms the trend change and so this is a good opportunity to take a buy
position another price action analysis that you can use to confirm a trendline
breakout is by spotting double rejections before a breakout appears
let me give you an example in this chart we can see that the
price was on an uptrend as prices were making higher highs now as we look at
the latest price action we saw that the price failed to make higher highs and
formed a double top pattern instead indicating a strong rejection in this area
which is also a sign of momentum loss next we saw the price broke out of the
trend line which further confirms the trend change so this is a good
opportunity to take a sell position let's look at another example so again here
we spotted a downtrend and so we place a trend line above it as prices were
making lower lows then we also noticed the same double rejection pattern at the
bottom indicating that there's a strong support zone within this area next we
saw the price broke out of the trend line which again confirms the trend change
to the upside and so this is a good opportunity to take a buy position now
another indicator that can also help you confirm a price breakout pattern is
the rsi but first we need to make a couple of adjustments to the indicator so
you want to go to the indicator settings and change
these two values to 50. so now you'll have a single line in
the middle like this and the way we implement the rsi to our strategy is by
only taking buy positions if the rsi is above the 50 line and only taking cell
positions if the rsi is below the 50 line so let's look at this strategy in
action in this chart we spotted an uptrend and so we want to draw our trend
line below here now notice that the price broke below the trend line signaling
a possible trend change however you can see that the rsi is still above the 50
line and so you don't want to take any positions yet you need to wait for the
rsi to confirm the trend change by waiting for it to cross below the 50 line once
this happens you take a sell position so I just revealed to you multiple
trendline trading strategies that you can immediately trade right now.