Knowing how to utilize the power of trendlines as part of your forex strategy can make a big difference to you profits. Getting in at the right level results in more pips which can accumulate steadily.
Two methods of drawing trendlines are:
1. The common sense method. By just running the eye over a candle chart, it is easy to identify a series of lower highs or higher lows. Drawing a trendline across the tops or the bottoms will indicate where price is likely to bounce in the future.
It is not necessary to be obsessive about the trendline having to touch exactly all the highs and lows. In some cases they may touch the bottom of some candle shadows, in other cases, they may touch the bodies of the candles.
2. The Tom DeMark method. Tom DeMark, a highly respected market analyst, suggests connecting the last high with the previous high in a downtrend and extending the line past current price action OR connecting the last low with the previous low in an uptrend and extending the line past current price action.
Highs are candles that have lower candles adjacent to them on the left and right and lows are candles that have higher candles adjacent to them on the right and left.
These trendlines can be regularly updated as new highs and lows are formed.
Many traders enter a trade on the break of a trendline as part of their forex strategy. That works for many.
However, there is a way to use trendlines to ensure an optimum entry point.
Often, not always, price will break a trendline and move away 10 or 20 pips. Then, it comes back to test the backside of that trendline. That’s where you enter the trade.
If the trendline break coincides with your other favorite indicators such as pivot points, Fibonacci calculations, set an entry order for price to take you in when it comes back to test that level.
That way you enter the trade at an optimum level and squeeze even more pips out of the move.
Of course, price may not come back to test the backside of the trendline so your order doesn’t get taken in and you miss the move. No problem. As a trader patience is an essential quality you develop as a part of your forex strategy. You simply wait for the next time!
Michael A. Jones is a writer and webmaster with over 10 years experience who also trades the forex regularly. For screen shots of trade entries using trendlines go to this page:
http://www.vitalstop.com/Forex/forex-strategy-trendline-backside.html
Click here for his advice for absolute beginners:
http://www.vitalstop.com/Forex/learn-to-trade-the-forex.html
Michael has also put together a list of key free resources which he finds invaluable:
http://www.vitalstop.com/Forex/forex-directory-free-resources.html
Written By: Michael A. Jones
