Sophia Todorova has a background in teaching and psychology, and as such relishes the idea of assisting new traders on their journey to Forex trading success. Technical Analysis is her passion. The charts speak, and she listens.
A trendline break can signify a potential change in the general trend. However, one does need to be aware that price having broken the opposite end of a trendline does not automatically mean a reversal. On the chart below, the labels mark the buy and sell zones that resulted after the trendlines were breached. In both cases, however, the market found support (in the sell zone) and resistance (in the buy zone). Price bounced off of these areas continued in the direction of the previous trend, forming a channel.
So then, how can we as traders protect ourselves from getting caught off guard in situations such as this? It is important to always be aware of what is happening on the bigger timeframes, while at the same time watching the price action on the smaller ones for clues regarding follow-through. Using the example presented here, when the 4-hour trendline got breached to the downside, a look at the daily chart will reveal the shelf of support that was made at the neckline level of the head and shoulders pattern (chart posted below).
In relation to the second scenario, where the 4-hour down trendline was breached, refer to the daily chart, and you will realize that although some support was found at .9900s, the daily was pulling back after having made a major high, and so it was very likely for the daily trendline to get tested before a resumption of the trend.
The smaller timeframes (5-15 min) are useful for giving a heads-up regarding potential turns.
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