Counter trend line forex

This is called a test of support and encourages buyers to buy more after the price passed the test. Often traders engineer a test of support by selling the currency down to the support line to see if the support will hold. If you put on a new position above the support line, you might have to bear some damage when traders test support. Will buyers rush in to support the currency? The reason that this strategy can work so well is: if the support holds, traders who were selling become buyers, and the market can be propelled back upwards very fast.

You can see that the trendline had begun to form on March 28 at the first significant low, and the next low had confirmed it. The third low, which I have named Buy 1 , could have been a nice spot for traders to take up buy positions for a 50 pip gain, but for most traders it would have represented another confirmation point for the trendline support. After that point held firm, trendline traders would have drawn and highlighted the support trendline above, and put in buy limit positions at Buy 2 , taking the EURUSD from 1.

At that point in time, it would have looked like the trendline would never be touched again, as it was so far above. However, on April 1, the traders had charged back to retest this trendline one final time, at Buy 3 , and when it held firm once again, they jumped in to shoot up the market like a rocket back to its former highs, from 1.

It can be the nearest level of support or resistance according to Pivot Point Levels.

Exit the buy position when the low of the bar falls below the support trendline by a predefined number of pips. This predefined number of pips should be based on the Average True Range ATR of the currency pair for that time frame. Thus, in Buy 1 and Buy 2, you would have suffered very little DD Draw Dawn risk for the profit taken, as the trades bounced soon after touching the line.

However, in Buy 3, you may have taken your trade from the line at 1. If you had only a fixed pip stop loss on your trade, you would have been stopped out just before the correction had occurred. The average true range method would have been enough wiggle room to keep you in the rubber band trade as it stretched as far it could go before snapping back. When any part of the price bar penetrates the line on the downside, support may have been broken, or the trendline becomes unreliable.

If the move continues to the upside after the trendline is broken, the trendline becomes unreliable. A breakout is any part of the price bar penetrating a line that you drew on the chart. Some traders require that to qualify as a breakout, the bar component that breaks the line has to be the close. Sometimes the offending breakout is quickly roped back into the herd, but usually a breakout means that the trend is changing direction, either right away or sometime soon.

The more times that a high of the time frame touches the resistance line without crossing it, the more confidence you should have that it is a valid description of the downward trend.

This is called a test of resistance and encourages sellers to sell more after the price passed the test. Just as traders engineer a test of support, they engineer a test of resistance. You are hoping that the sellers will rush in to hold the resistance line, and if the resistance holds, traders who were buying will become sellers. The downtrend on the chart above was started for this year only. It starts with a swing high on Dec 20, and gets the second swing high on Jan 31, which allows forming the downward trendline resistance.

Trendline traders would have drawn the same trendline and taken short positions at the approximate area of the trendline. The first short position Sell 1 came at Feb 10, at 0. The second short position Sell 2 followed in the same month at 0. The third short position Sell 3 came on March 15, and it would have been much trickier to stay on board with this one without getting stopped out. One would have entered around 0.

If you had managed to be still in the game, you would have seen the market fall lower to 0. As mentioned before, I prefer an average true range based on the currency and time frame in question than a fixed stop. In either case, you would have been able to take Sell 1 and Sell 2 with very little open DD, as the trades touched the line before descending. Only a fixed stop of pips or more would have let you survive that trade.

Sell 3 was very tricky, and only the more veteran trendline traders would have had the balls to jump back in after being stopped out. The above strategy helps traders enter or stay in a trend. The trading mistake is staying in the trend after the trendline is broken. Sometimes new traders will be resistant to take a loss, and they keep giving the trade more wiggle room, hoping it comes back.

They may even draw in new, flatter trendlines, hoping the market stays bound by them. All traders should be prepared for both the bounce and the break.

It is a matter of keeping your mind and eyes open to both possibilities, which can be harder than it seems. Usually, when we trade for a specific direction, we develop a psychological bias for that direction, and we are reluctant to swing degrees around and take a trade in the opposite direction. It would be ideal if we were so flexible, though usually what takes place is that we side with one method or the other. For instance, if the daily or H4 time frame is strongly bullish, you would want to place a buy stop for a breakout through a downward trendline taking place on a H1 or M30 time frame.

That way you will be trading with the larger trend current, which would give you a better edge than otherwise. Draw a downtrend trendline or uptrend line using the rules drawing trendlines discussed above. Choose a timeframe that illustrates the setup with the best slope, with preference given to higher timeframes over lower ones.

Intro: The different market phases

The entry is done on the breakout of the downward trendline or the breakdown of the upward trendline by a predetermined number of pips. The predetermined number of pips should be appropriate for the currency volatility and time frame. Usually, a break of the trendline by 10 pips should be sufficient. You can see a very interesting downward trendline resistance had formed on two swing highs solid red line. Since the larger trend was up, it was chosen to have a buy stop entry 10 pips above the trendline dotted red line , which was hit at am on March Three bars later it hit 60 pip profit target.

You may even want to experiment with timeouts, counting the number of candles before the target is reached, and if it is not reached in x number of candles, you close out the trading positions. You can have it a couple of different ways. Or you can determine a stop loss that is the 7-period average true range of the currency and time frame in question.

Sometimes it can lead to a resumption of the same trend. A move upward that occurs after the first breakout above the resistance line is called a retracemen t, correction, or pullback. It is thus always wise to employ a stop loss.

A one or two bar break of the line that reverts back to the trend is called a false breakout. It is called false because it proves false your conclusion that the breakout will continue on the path of a trend reversal, when in fact it is just baiting to lure the breakout traders into a losing trade that ultimately reverts back to the trend. Traders have discussed different ways of confirming the validity of the breakout.

One method is to wait for the close of the breakout bar; if the close is above the downward trendline, it helps to confirm the breakout. The downside to this confirmation is that it forces you to get in on the trade later, and thus miss part of the move. Alternatively, master trader Larry Williams recommends that one consider the position of the close of the day before the breakout.

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Thus, a filter for the close of the breakout bar or the preceding bar can cause traders to miss part or all of the breakout move, and it is sometimes best to trade without such filters, knowing ahead of time that the breakout can ultimately be a false breakout and resumption of current trend , and that is why you are using stop losses. One of the most common mistakes regarding trading with trendlines is to trade on an unconfirmed trendline which connects only two points of the price.

As a rule of thumb, the more times the price has touched the trendline in the past, the more important the trendline becomes. As you can see, the falling trendline connects consecutive lower highs in a downtrend. A trader could enter with a short position each time the price reaches the trendline from below, touches it and reverses. A stop-loss order should be placed just above the trendline. Another common mistake is to move a trendline to get a tradeable and actionable setup.

In this regard, trendlines are very subjective.

Every trader can fine-tune a trendline to get a long or short opportunity. Besides trading bounces off a trendline, you can also look to trade breakouts above a falling trendline and below a rising trendline. These breakout trades are usually followed by a large trading momentum in the direction of the breakout, which makes them a popular trading approach among day traders.

However, before a breakout occurs, the price tends to cluster around the trendline and the time between the consecutive touches tends to become shorter. As the uptrend started to lose momentum, the times between each consecutive touch on the trendline became shorter. Finally, the time between the last two touches was only seven days, after which the pair broke below the trendline and started a strong downtrend. Fake breakouts are very common when trading with trendlines. A fake breakout occurs when the price looks like breaking above or below a trendline, only to reverse its course and leave the breakout trader with a losing position.

Almost all trendlines that you apply to a chart will occasionally have fake breakouts.

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The key is to connect as many higher lows or lower highs as possible, and leaving the fake breakouts outside the trendline. Fake breakouts are actually a great trading setup, especially if they come together with bearish or bullish indicator divergences. This is one of my favourite trading strategies — catching fake breakouts with pinbar patterns and confirming them with RSI or Stochastic divergences.

When trading fake breakouts, you have to wait for the price to actually reverse inside the trendline. Those candlesticks that form fake breakouts often have long upper or lower wicks, signaling that sellers buyers are joining the market and pushing the price back inside the trendline. This is a powerful price-action signal to enter in the direction of the trend. Popular tools to confirm trades based on trendlines include Fibonacci retracements, candlestick patterns, and technical indicators. In an uptrend, we want to catch the end of a price correction counter-trend move that bounces off a rising trendline.

If that level also aligns with an important Fib level, such as the This gave us a double-confirmation to enter with a short position by placing a stop-loss just above the trendline. Candlestick patterns are also a popular tool to confirm a setup based on a trendline. Strong bullish or bearish candlestick patterns, such as engulfing patterns, Marubozu patterns, or reversal evening and morning star patterns that form right at a trendline can be used as a confirmation to enter into a trade.

Finally, overbought and oversold levels of oscillators, as well as bearish and bullish divergences that form around trendlines often confirm high-probability trade setups. All mentioned confirmation tools can also be used when trading fake breakouts. Just like most other technical tools, trendlines return better results when applied to and traded on higher timeframes, such as the 4-hour, daily, and weekly ones.