Tad DeVan is a Senior Forex Analyst for Market Traders Institute and host of the Ignite Trading Room. Ignite Trading Room is FREE to join for active SmartTrader users. CLICK HERE to join today >>
Trading counter trendline breaks is a great strategy you can use on just about any asset in a bullish as well as a bearish market. In today’s blog, Tad shares how you can utilize counter trendlines to spot consistent entries and stops.
Today, I want to show you one of my favorite strategies for trading counter trendline breaks.
Top traders often use counter trend line breaks to take advantage of market movements. The good thing about it is you can apply it to your own trades whether it’s a bullish or a bearish position.
So, let us understand what trendlines are and how you can trade counter trendline breaks…
Trendlines are one of the most common forms of technical analysis in Forex trading. They are widely used by traders to predict the entry and exit timing of an investment.
As the name suggests, trendlines are nothing but the levels used in technical analysis that can be drawn along a trend in order to represent either support or resistance levels for the price of an asset. And understanding these trends – uptrend, consolidation, and downtrend – goes a long way in implementing a well-designed trading strategy.When the price of an asset is rising, connecting the lows with a line gives you an ascending trendline – which is called an ‘uptrend’ or ‘bullish trendline.’
Bullish trendlines act as a support level indicator.
On the other hand, when the price of an asset is falling, connecting the falling high levels gives you a descending trendline – also called a ‘downtrend’ or a ‘bearish trendline.’
Downtrend lines act as resistance level indicators.
With that, let’s now quickly understand what a counter trendline break is…
Counter Trendline Breaks
A counter trend strategy aims at making small gains by trading against the ongoing, broader trend. It assumes that the prevailing trend will see small reversals. And it attempts to profit from these reversals as the trend continues.
So, a counter trend line will show a market movement that’s smaller than the overall trend. And second, it will run in the opposite direction to the overall trend.
Let’s say your trendline is bullish. In this case, you can draw a counter trend line on any smaller bearish movement occurring on the larger bullish trend.
Simply speaking, trading counter trendline breaks involves
- Buying at the break in a broader Bearish trend
- Selling at the break in a broader Bullish trend
And in that way, you can use this strategy to predict where the trendline breaks and try to profit from it.
Here’s how you can apply it to your trades…
Let’s say a trader is hoping to take advantage of a bullish market multiple times. One way they could do this is to trade every time a bearish counter trend line is broken.
The opposite also works on bearish markets where you trade on bullish counter trend line breaks.
Using Counter Trendlines on SmartTrader
Open up a new chart on your SmartTrader trading platform on which you want to place the smart Fibonacci.
Next, go to the indicators list located at the top of the chart and click on the ‘Geometric Drawings’ button and select ‘Trendline.’
Next, look for a counter trendline break on your chart. If there are three or more candles moving in the opposite direction of the broader trend, you can draw your trendline on it.
Here’s how it should look:
Trading Counter Trendline Breaks for EURAUD
Now the way you can trade these trendline breaks is by looking at the latest high level near your trendline and placing a trade 15 PIPS away from that level.
In the image above, the strategy is looking to profit in a broader downtrend at every small bullish break. So, the red horizontal line is where we can place our trade to sell it lower. And we can target a 1:1 or 1:2 risk-reward ratio trades with this strategy and place the target and stop losses accordingly as indicated by the yellow and blue lines on the chart.
Here’s a bonus tip: Draw your upward or bullish trend lines beneath your candles in your charts, and your downward or bearish trend lines above your candles. That’s how the pros do it!
So, that was a simple counter trendline break strategy you can use in a bullish or a bearish market to try and capture some potential profits.
Do check it out the next time you’re on your charts!
I have also recorded a short video on this concept, which you should WATCH HERE >>
For more such strategies and trade setups, click here to check out my Analyst On Demand Trading Room.
Every week, within the trading room, I’ll take you through real market conditions and guide you on your journey to becoming a consistent trader across the board. Access it HERE >>
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