Our series on TREND LINES in the Forex market continues with part 3. Today we focus on explaining the psychology behind steep trend lines, how to use steep trend lines for breaks and bounces, and other interesting tips on trend lines.
STEEP TREND LINES (TL)
First of all, what is in fact a “steep” trend line?
A steep trend line is typically a line with an angle of roughly 40 degrees or more. Basically, a steep trend line means that price action is moving very impulsively (with lots of momentum/thrust).
Momentum is awesome because traders are able to hit bigger targets quicker. For instance whereas a correction could take 4 days and bounce up and down between a range of 75 pips, impulsive price action could move the same number of pips or more within a few hours. Let’s discuss some more specifics.
Impulsive price action occurs when candles are regularly making new higher highs and higher lows or lower lows and lower highs. Or in other words, price is moving quickly into one direction the majority of the time. In these cases price keeps falling and falling OR rising and rising without much pause. Contrary to corrective price patterns, the impulse is less complex and pretty straightforward: it’s all about the up and down momentum. The impulse often is quick and is a great deal shorter than corrections – roughly 3 to 4 times shorter.
HOW TO TRADE STEEP TL
Traders can trade impulses the following way:
- PRE & POST BREAKOUTS: entering before the impulse in fact happens OR just after the break of a chart pattern – see part 2 where breakout trades are discussed in more detail.
- DURING IMPULSE: taking a trade during an impulse. Impulses will not last forever, but sometimes do last longer than traders imagine!
- BOUNCES OFF OF STEEP TREND LINE: when trading impulsive price action, it could be best to zoom into a lower time frame chart and trade the bounces off of the steeper trend channel or line. Traders can also use trend lines on lower time frames to trade mini breakouts of shallower trend lines.
- BREAKS WITHIN STEEP CHANNEL: if price has moved a considerable distance and price is far from the last chart pattern, then trading the impulse is not advisable because the chances of the impulse stopping (soon) are high (and price will start a new correction). If a trader is already in the trade, then they can use these steep trend lines as a trail stop loss and exit point when price breaks to the oppose direction.
- REVERSAL BREAKS OF STEEP TREND LINE: reversal traders could use the same steep trend line as an entry point for their reversal trades (only manageable with lots of experience). For instance price is moving down impulsively and after a while the downside impulse ends. Price then starts to break above the resistance line. This could merit an entry to the upside. This is a more aggressive way of trading and is only advisable with more experience and if the bigger trend is aligned with the breakout direction.
EXERCISE: practice the above by drawing 1 trend line on an impulsive part. Post the chart down below.
IMPORTANT ELEMENTS WHEN DRAWING TREND LINES
When drawing trend lines you must realize that the market is not “perfect” and therefore trend lines do not need to be “perfect” either. As explained in part 1, trend lines cut through wicks and even parts of candle sticks. Here are some additional tips and tricks when drawing trend lines on the charts:
- The starting point of your trend line does NOT have to be the (major) top or bottom. There is no rule whatsoever that states that all trends MUST originate at the bottom or top. Trend lines can be great trend lines even if the origin of the trend line is using a level which is not considered to be (an important) top or bottom.
- Drawing multiple trend lines on the chart provides more information and there is no rule that limits their use. The only danger is paralysis of analysis and traders need to make sure that the chart is not overcrowded and remains readable and understandable.
- Drawing multiple trend lines on the same tops or bottoms but at different angles is also good because the market is potentially able to use multiple support and resistance lines. By drawing 2 or 3 trend lines, a trader creates a zone of support and resistance rather than 1 single point of reference.
- Trend lines can be pointed in all directions. Just because price is in an uptrend does not mean all trend lines must be down too – or up. Trend lines can be pointed up and down regardless of the trend.
- The angle of the trend line will alter depending on how much a trader zooms in or out. When the trader zooms in a lot, the angle will seem shallower than if the trader is zoomed out more. The angle of the trend lines becomes steeper when a trader sees ultra tiny candles (heavily zoomed out). The rule of thumb is that traders should have roughly 150-200 candles on the graph, which provides the best balance for identifying trend line angles. Anything less than 150-200 bars means that the angles of trend lines are too shallow; anything more than 150-200 bars means that the angles of trend lines are too steep. The rule of thumb is valid for all time frames. For an hourly chart, this means that the optimal balance is having 6-8 days worth of price action on the chart. For a daily chart, this means that the optimal balance is having 150-200 days worth of price action on the chart.
EXERCISE: practice drawing multiple trend lines using the above tips. Post the chart down below.
NEXT WEEK’S GOAL
Next week’s article (part 4) will review how trend lines and trend channels interact and why using the two concepts in tandem is such a powerful trading strategy. Don’t forget to post the exercises down below. Thanks for sharing this article and wish you Happy Trading and a nice weekend.
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- Money Management in Forex: More Than Just Trading - February 17, 2018
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- Using Multiple Trendlines to Identify Better Trades - February 15, 2018
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