Mastering the art and science of trend lines requires a ton of practice and discipline (just like any other skill). Last week I released part 1 of a series on trend lines and it’s time to take that new information and put it into practice (here is the link to that important post for an easy reference). Let us start with applying the trend line knowledge step by step on the charts.
Step 1 where to start
First of all go to the currency pair or pairs and the time frame(s) that you usually analyze and trade (read more here on selecting pairs). In this post we will be using the GBPUSD as an example. Then as the article on trend lines explains, we are searching for 2 points on the charts which can be connected. That is the first basic trend line, such as the screenshot here below shows:
However you might quickly realize that there are a ton of trend lines, which clutters the charts and causes paralysis of analysis. Obviously you want to avoid your chart looking like this:
Step 2 keeping the best trend lines
To keep the chart relevant and effective, we will select the trend lines which in fact have importance for future decisions. That means most past trend lines will be removed unless they are close to price (point 4 states that broken trend lines can act as the opposite support and resistance zone).
We can then add the various layers of criteria to filter out trend lines and only select the ones which will help our future trading decisions such as: proximity to price, number of hits on the trend lines, neatness of a trend line, and distance between hits. When we add these elements to the mixture, then the chart looks like this:
When we review these trend lines one by one you will notice that most of the trend lines match the guidelines, but there are occasional exceptions because one guideline becomes more important. For instance the neatness of a trend line is important but if it loses a bit of that neatness to increase the number of touches from 2 to 3, then that is OK. However, if the trend line were to become less neat and place entire candles outside, then the increased number of touches is not important. Here is an example of where cutting through a bit of a wick is OK to increase the number of touches to 3.
You can repeat the same process for more time frames of the same pair or venture out to other currency pairs. The advantage of reviewing multiple pairs is that traders can focus on situations that match their strategy or best suit their style of trading.
Step 3 trading purposes
Currently there are many trend lines above price which means that price has a decent number of resistance layers to deal with. Also, from this 1 hour time frame perspective price seems to be in a downtrend. Although price might be in fact breaking above some of the trend lines right now, there are many resistance spots remaining. And although price is showing bullish movement at the moment as well, I am therefore skipping a long trade setup because I want to avoid longs in front of resistance. My plan is this:
- I will wait for price to break above the resistance first before longing
- I will wait for price action confirmation (candle stick patterns) at resistance for potential shorts
Step 4 keep monitoring trade management
After the trend analysis has been completed, it is up to the trader to keep a watchful eye on the setup and if need be place appropriate entry, stop loss and take profit. In my plan I was looking for a candle stick pattern and I got a shooting star in my zone. The short at the close of that candle is working out fine as price tumbles down from the resistance zone. The trade can be moved to break even and the trader can wait for price to hit the take profit without risk. Great work, or as detectives would say: “another case closed.”
PRACTICE: take a chart and place your own trend lines on it and post the chart below the article!
Thanks and Happy Trading!
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