Trend Lines Strategy

Many novice traders, after studying graphical and technical analysis, usually come to build their own trading strategies for Forex based on indicators.

The knowledge gained from graphical analysis about support and resistance levels, as well as trend lines, instantly disappears from their heads, and if technical analysis is used, it is chaotic and unsystematic.

The fact is that a person is inclined to trust something or someone more than simple things and himself.

Thus, support and resistance levels, as well as trend lines, at first glance are simpler and more effective, but traders still prefer complex indicator systems.

There is an opinion that graphical analysis on Forex has not worked for many years. However, in reality, almost no one approaches level analysis systematically, and only in rare cases does graphical analysis become a system with a number of clear rules and requirements.

The Trend Lines strategy is a multi-currency trading strategy that is based on the simplest element of graphical and technical analysis of a trend line. Since trend lines can be drawn on any chart where there are only two points to plot, you can safely apply the strategy both on the foreign exchange market and on the stock and futures market.

Initially, the strategy should be applied on the hourly chart with clarification of the entry point on the five-minute chart, but if you look a little wider, it turns out that tactics can be used at any intervals and even during five-minute scalping.

Construction of trend lines. Trend Lines Signals

As we have already mentioned, the Trend Lines strategy does not include a single technical indicator, and all trading takes place around an ordinary trend line.

That is why you must clearly understand the concept of a trend line and how it is built. So, let's take a closer look at the signal and the necessary construction in order to enter a buy and sell position. Conditions for entering a purchase:

1) Draw an ascending trend line through two points (in a bull market).

Conventionally, mark the first point on the chart as 0, and the second as 1. 2) Next, you should wait until the price pushes off from point 1 (the second point when constructing a trend line) and forms a local maximum.

After the price begins to decline, mark this local maximum with number 2. 3) When the price begins to approach the trend line (the third point of the trend line is formed), place a pending Buy Limit order .

As a rule, after the price approaches the trend line, the rollback will end, and the price will go up and activate a pending buy stop order.

If this does not happen, we delete the pending order and skip the signal. The stop order for the Trend Lines strategy should be set at the level of point number 1 (the second point when constructing a trend line) and the profit at the level of point 2 (the local maximum). Example:

 Conditions for entering a sell position:

1) Draw a downward trend line through two points in a bearish market.

As with purchases, mark these two points with numbers 0 and 1. 2) We wait for the moment when the price pushes off from point number 1 (the second point when constructing a trend line) and forms a new local minimum.

After the price begins an upward movement towards the trend line, mark this minimum with number 2. 3) At the moment when the price begins to roll back from the main trend and tries to approach the trend line to form a third touch point, place a pending Sell Limit order at a distance of 5-8 points from the trend line.

If the price breaks the trend line and continues its upward movement, and the breakout does not turn out to be false, the pending order is deleted.

As with purchases, the stop order is set at the level of point 1 (the second point when constructing a trend line) and the profit at the level of point 2. For more details, please see the image below:

 In conclusion, I would like to note that the Trend Lines strategy has simply enormous potential, since entry into the market occurs not just after the end of a rollback in the market, but also affects such a strong pattern as a false breakout.

Thanks to a limit order, you enter not when the price crosses the mark, but when it moves in the opposite direction, which protects you in case you get a real breakout of the trend line .

It is also worth noting that, in general, the profit exceeds the size of the stop order almost twice, and sometimes three times. If you observe a situation where the potential profit is less than the potential loss, ignore the signal.