Trend lines have a lot of uses but the main ones are trend line bounces and trend line breaks. We will go over how using trend lines correctly can give you great advantages with your trading. Check out the image below:
This trend line has 3 bounces so it is active. Now that price is approaching the trend line again, what will happen? Well, the trend line will either continue to hold or it will break. Let’s take a look at what happened this time around.
Wow – it broke and climbed over 200 pips!
This trend line has 3 points. On the fourth, the trend line tried to act as resistance. If it had succeeded, price would have reversed and continued down. However, the bullish movement was too strong. That means that the overall bearish trend is over and a bullish trend has begun.
Now let’s take a look at a trend line bounce.
Once again, this trend line has had 3 bounces and is now active. As you can see in the image, the price is approaching the line for a fourth time. Price will either break the trend line or bounce away it. This time it bounced.
Look at that – it bounced and went up by 150 pips.
If you read about candles in the previous sections, you will have notice in the picture above that there was an indecision (reversal) candle on the trend line! You might think that because the wick went below the trend line it was technically broken. Well – this is where it gets tough!
There are three schools of thought on what constitutes a trend line break. Strict, moderate, and lax.
Strict – These trend line users believe that as soon as a candle passes through a trend line, it is broken and a trade can be entered.
Moderate – These trend line users believe that as long as a candle’s body does not close beyond the trend line, it is not broken. That means a wick can poke through the line – like in the image above – but as long as the body doesn’t then the trend line is still active.
Lax – These trend line users believe that a candle must first break through the line and then the body must close beyond it. When the next candle opens beyond the line they finally consider the line to be broken.