In this post, Chris Pulver – Senior Currency Strategist – offers a timeless lesson on how to use trendlines with price action. It can be as simple as staying with the trend on the left side of the trendline, and waiting for confirmation to trade the right side of the trendline.
We will also take a look at the difference between trade anticipation and trade confirmation. To know more about the systems, tricks, and strategies that Chris uses to target profitable trades, you can sign up for his free weekly newsletter by clicking here.
Trendlines are like the heartbeat of Forex trading – they pulse with opportunities for savvy traders to ride the wave. It’s all about knowing when to hop on and when to gracefully exit.
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.
So, let us take a look at what trendlines are and some strategies you can follow to interpret the trend and learn how you can target potential profit from it.
The ABCs of Trendlines
Before we dive into the nitty-gritty, let’s brush up on some trendline basics.
There are three critical trends to keep in mind: uptrend, consolidation, and downtrend. These trends lay the foundation for a solid trading strategy.
Uptrend: Picture a rocket ascending into the sky. When the lows of an asset’s price are connected with a line that slopes upwards, you’ve got yourself an ascending trendline, or as we like to call it, a “bullish trendline.”
Bullish trendlines act as a support level indicator and as long as the price is above the trend line, the uptrend is considered intact.
Downtrend: Now, think of a waterfall cascading downwards. When the highs of an asset’s price connect to form a descending line, voila! You have your descending trendline, also known as a “bearish trendline.”
Downtrend lines act as resistance level indicators and as long as the price is below the trendline, the downtrend is considered intact.
Here’s a look how these lines show up for an asset or currency pair on a chart…
Bullish Trendline on RHS and Bearish Trendline on the LHS
Source: SmartTrader, Market Traders Institute
With that, let’s go over how you can interpret these trendlines for setting up trades…
So, here’s the real deal when it comes to trading trendlines: it’s all about distinguishing between the left and right sides.
Trading the Bullish Trendline:
Let’s kick things off with the bullish trendline.
One important lesson while reading trendlines is to look for the left side vs the right side of the trendline to interpret how the trend is performing.
Let’s take the bullish trendline as an example to understand this.
We will see the price rising to higher highs in this case. Draw a line at all the low price levels of this rally and you have a bullish trendline (the blue line in the image below).
And when we talk about trading this trendline, we’re basically trying to BUY at all the low price levels of this rally. So, whenever the price touches the blue trendline, we buy and average our positions to try and sell at higher levels for potential profits.
The most important thing to remember while trading this trendline is to look for when the price is consolidating or falling and the uptrend seems to be coming to an end. A simple way to do this is to look where the price is inching towards – the right side or the left side of the trendline.
If the price is on the left side, we still have the uptrend intact. However, if the price is on the right side of the bullish trendline, it indicates a stop or break in the uptrend. And this is where we would look to sell positions for potential profits.
So, the two simple ways to trade a bullish trendline are:
- Buy at lows when the price is on the left side of the trendline. This is also called the anticipation phase as we’re anticipating the rises and setting out to buy the rally here.
- Sell when the price breaches the bullish trendline and starts diverging and moving on its right side. The right side of the bullish trendline is also called the confirmation phase as the price is confirming a break in the uptrend when it falls below the trendline.
Trading the Bearish Trendline
The same principles we saw above hold true for trading bearish trendlines.
In the case of bearish trendlines, we will see the price falling to lower lows. Draw a line at all the high price levels of this fall and you have a bearish trendline.
While trading this bearish trendline, we’re basically trying to SELL at all the high price levels of this downtrend. So, whenever the price touches the blue trendline, we sell and average our positions to sell at even lower levels to try and capture potential profits.
The important thing to look for while trading the bearish trendline is to look for when the price is consolidating or rising and the downtrend appears to be coming to an end.
If the price is on the left side, we still have the downtrend intact. However, if the price is on the right side of the bearish trendline, it indicates a stop or break in the downtrend. And this is where you could sell your positions for potential gains. You could also start buying at these lower levels if you see a bullish trendline pattern forming.
So, the two simple ways to trade a bearish trendline are:
- Sell at highs when the price is on the left side of the trendline or the anticipation phase.
- Sell positions at lower lows or start buying fresh positions when the price breaches the bearish trendline and starts diverging and moving on its right side or the confirmation phase.
There you have it, a straightforward yet effective strategy for reading bullish and bearish trendlines.
With the power of trendlines and price action in your arsenal, you’re poised to navigate the markets with confidence and precision. Check them out the next time you’re on your charts!
But this is just the beginning. For more simple-to-apply, time-tested Forex strategies, we’ve got a gift for you. Download our FREE ebook to uncover these gems and avoid the critical trading mistakes that even the best traders have made. Click here to get your copy >>
And if you’re looking for trade strategies for the current market, you should check out Chris’ Trading Rooms. It’s where you get to learn the very trades and strategies he employs personally. Click here to take the trading room for a test drive.
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