Forex trading trend line strategy

Advanced strategy #10 (Trend Line Trading Strategy)

Submitted by Edward Revy on October 4, 2008 - 08:30.

A truly great work has been done by Myronn , the author of the current Trend Line Trading Strategy.

Support-resistance trading, trend line trading, checking higher time frames, money management — the strategy has a concrete-like theory base and a simple implementation — a winning combination, that places it into the category of advanced strategies.

Remember, your feedback, comments and suggestions are always in great demand!

First of all, this site is awesome. Edward, you are a great man.

I have been demoing a simple trading strategy for a week (29th September-3rd of October 2008) and achieved almost 200% return on investment in a week with $5000 account and I would like to share it and it would be great to have many involved in testing this strategy out.

I am calling this a Trend Line Trading Strategy and it is based on:

Following the trend.

Heard & read that before a million times? Lol… I cant blame you. But maybe you can learn something extra here.

Do yourself a favour and take a look at a chart and see if you can identify a trend. Is there a main established trend? It is important that you identify the main trend & once that is identified, your trading decisions are based in the direction of the main trend. There are exceptions where you can go against the main trend, but I wont touch on that here. KISS… KEEP IT SIMPLE & SIMPLE.

Timeframes suitable for these strategies are the daily, 4h, 1hr, 30mins.

I use only 1 Metatrader4 indicator called Swing ZZ(zz for zigzag). It is freely available in the net, just google it and you can download it. Thanks to the programmer who wrote it. This indicator is helpful simply because you can identify previous swing highs and lows which act as resistance & support levels and I think it is a handy tool to use in this strategy.

So lets get started shall we? I call this trendline trading strategy because it involves drawing trend lines using the swing highs and lows of the Swing ZZ indicator.

SHORT ENTRY RULES:

(a) look at the timeframe you wish to use and identify the main trend. Get the big picture first, that is very important. For me, when I want to trade on the hourly chart, I first check the daily chart and also like to see what is happening in the 4hr chart as well to see if I can spot an obvious trend or channel or congestion happening in the daily and the 4hour charts. I stay out if there is congestion until breakout of the congestion happens and a trend is established. I draw trendlines in the daily or on the 4rhly charts chart then switch to the 1hr timeframe. I identify trends in the hourly and draw trendline(s) as well.

(b) I place a sell stop order, at least 5pips below the LOW of the candle that touches or intersects the trendline. The trendline can be the daily, 4hrly or the 1hr trendline. You must place your order when that candle closes. Why 5 pips? I don’t know, 5 seems like a good number to me… I have five fingers on each arm and similarly for the legs, so 5 is a number I was born with… Put 10 pips if you want. Note you must wait for price to approach a trendline or very near to the trendline before you place your sell stop order.

(c) I prefer to place my stop loss at least 5 pips above the most recent swing high. You should set your stop loss according to your money management calculations and risk tolerance.

(d) I set my profit target just WITHIN the level of previous swing low.

(e) Trade management: as trade moves in my favour, I move my stop loss to at least 5 pips ABOVE each lower subsequent peaks (lower swing highs).

LONG ENTRY RULES:

Just do the exact opposite of short entry.

(1) Set your buy stop order 5 pips ABOVE the high of the candle that intersects the trendline when that candle CLOSES.

(2) I set my stop loss just below the recent low.

(3) I place my profit target WITHIN the level of the previous high.

(4) As trade moves in my favour I move stop loss to at least 5 pips just UNDER each higher subsequent higher swing lows that form.

SHORT ENTRY EXAMPLE:

The attached is 4hr USD/JPY chart showing short trades that could have been taken and would have been very profitable using this strategy.

(all screeshots are clickable)

LONG ENTRY EXAMPLE:

Attached is USD/CAD daily chart and possible trade entries are shown to give you a visual understanding of how to identify potential trade setup and take them.

Here is a screenshot of the trades I have taken using the strategy above. I have tried 1 min timeframe, 5 min timeframe and 15mins but towards the end, have tended more toward using larger timeframes like the 4hr, 1hr & 30min timeframe so that I don’t stay glued to the computer all day long.

Attached are account history screenshot of trades taken in two parts as I am unable to take 1 complete screenshot.

Wish you all good health.

This strategy is amazing, hats off for you buddy. I just want to ask you that i do not have swing zig zag indicator so is there any other substitute? I mean is there any other way to identify swing highs and swing lows? I hope you will reply soon.

BigPond wireless broadband hmmm. are you from Australia ?

pls contact me at myronn_s[at]yahoo and I will send the indicator to you.

You really dont have to use the swing zz indicator at all in this strategy. But it does make it visually easy for me identify swing highs and lows in the past and based on that draw trendlines.

In answer to your question regarding substitue: the concept of this indicator is very simple, it zigzaps between swing highs & swing lows and if you had to do without this indicator, all you have do do is you draw trendline(s) connecting significant peaks in a downtrend & connect significant lows in an uptrend. the high and and low peaks are easily identified on any chart. At a minimum of 2 "peaks" or 2 "valleys" is required for you to draw a valid trendline. A line of best fit is usually required if you have 3 or more points to conect.

Hope this answers your question.

Yeah, Ausie. lol, dead giveaway huh? where else will you find bigpond.

Thanks you very much for your quick reply and detailed answer for my question.

That's a power strategy! Thanks a million!

As I understood, all your entries are taken on 1 hour timeframe. Is that correct?

May I ask, how do you determine what swings to use (daily, 4 hour, or hourly) for setting stop losses?

Does it depend on the trend line being hit. Or am I mixing things up. Thank you!

Thanks for this great job. u definitely did well here..what i want to ask is that if u get the trend for daily,4hrs,1hr, will u just enter the trade? or u wait for something else? and which currency pair best suit the strategy finally what will be your next step if a candle just break your trend line, i mean will you have to wait for the trend to grow long to have a new and opposite trend line or what?

Regarding entry, I prefer to use the 1hr & 30 mins for the entries.

For stop loss, allow me to give an example here:When I place my sell stop order in the 1hr timeframe, i search for the previous swing high also in the 1hr timeframe and put my stop loss just 5 pips above it. If the previous swing high is just above my entry and my stop loss would be like (20pips) placed just above it, that is good. Ok, the issue is: what happens if the previous swing high is about 100 pips away(that would mean 100pips stop loss right? Can you take that or not? Depends on your risks tolerance & money management rule. When it violates my money management rule, what I do is I switch to a smaller timeframe and that would be the 30min. In there, I look for swing highs that would be much closer to my entry point and and with stop loss that fits my money management and that is where I place my stop loss just 5 pips at least above the previous swing high in the 30min timeframe.

Thats how i do it and i hope you all will experiment and see what fits each one of you individually as traders.

Remember, wait for the price to come to the trendlines before taking any trades, dont take anything in between the major trendlines. Patience is the key.

3 good questions, i try my best to answer them for you.

(1) if u get the trend for daily,4hrs,1hr, will u just enter the trade? or u wait for something else?

Answer: Drawing trendlines helps me spot the trend in the market and I know that as price nears that trendline, it does two things: it bounces off it & is made to follow/obey the overall trend direction or it intersects it and that can signify a new change in trend direction. I place my order as described in the strategy. there is nothing else that i wait for. Pls note that I advice not to use MARKET ORDER entries when prices near the trendlines because ANYTHING can happen there. it can break it & or can be made suject to the trendline. You place your stop orders with the CONFIDENCE that IF THAT TRENDLINE HOLDS TRUE, PRICE WILL MOVE IN THE DIRECTION OF THE MAIN TREND AGAIN. so you do not have to chase chase it, wait for it to come to your stop order.

(2)and which currency pair best suit the strategy.

Answer: any currency pair that is trending. stay out of trading if you cannot clearly identify any trends in whatever timeframes you would like to trade at.

(3) what will be your next step if a candle just break your trend line, i mean will you have to wait for the trend to grow long to have a new and opposite trend line or what?

Answer: There will be candles breaking or intersecting the trendline(s) trying to head in the opposite direction to the main trend. many times, these breakout will be false and will eventfully come down and obey the trendline that is why you have to wait patiently with your stop oder on the first candle the intersects the trendline. However, if the trendline is broken and a new higher swing high and higher swing low is made that may signify an uptrend. opposite for downtrend: new lower swing highs lower swing lows. when that happen, cancel whatever stop orders you may have and draw tredlines with in the direction of the new changing market condition and wait for price to come to the trendline(s)

Hope this helps.

Grateful for your detailed explanation. Got it :)

One more humble question, please: this time about profit targets. Same trouble: I enter on 1 hour chart, do I look for a previous swing on 1 hour time frame?

In your examples the charts are 4 hour and daily and profit targets are chosen accordingly. Were those entries taken on other than 1 hour chart?

Wish you all the pips in Forex :)

Active traders Poll - share your live experience or read what others have to say.

3 Tips For Trendline Trading.

Article Summary: Trendlines are a staple for technical Forex traders that can be used on any currency pair and on any time frame. Follow these 3 easy steps to drawing trend lines which is a powerful tool to time entries and exits of a trade.

A trendline is probably the most basic tool in the technical trader’s toolbox. They are easy to understand and can be used in combination with any other tools you might already be using. By definition, a trendline is a line connecting two or more lows or two or more highs, with the lines projected out into the future. Ideally, traders look at these extended lines and trade on prices reacting around them, either trading a bounce of the trendline.

So, what can we do to make sure the trendlines that we've drawn are sound?

Tip #1 – Connect Swing Lows to Swing Lows (or Swing Highs to Swing Highs)

We want to draw a line connecting either two (or more) swing lows or two (or more) swing highs. For those unfamiliar with the term swing highs/lows, we simply mean the peaks and valleys created with zig zagging prices. Once we connect peaks with other peaks or valleys with other valleys, we want to see the line not being broken by any candle between those two points. Take the examples below.

Learn Forex: Draw Unbroken Trendlines.

(created from FXCM Marketscope 2.0)

In the first image, you will find that we successfully drew a line connecting two swing lows. But, between those two points, the price broke through the line that we drew. This invalidates the trendline.

What we want is what we see in the second image, two swing lows connected together by a line unbroken by price. This is a valid trendline that is ready to be projected out into the future.

Next time price gets near this trendline, we will want to look for a bounce. A convenient way of trading this type of setup is using Entry orders. Entry orders can be set to get you into a trade at a specific price.

I like to set my Entry orders several pips above a support trendline or several pips below a resistance trendline. That way if the price reacts before getting to the trendline, I still have a chance at getting into a trade. You have to remember that if there are many traders looking at the same price to act as support/resistance, there is a chance that orders will be stacked around these levels. If there are enough orders keeping the price from getting to the trendline, the price might not get to you order if it’s placed directly on it.

Tip #2 – The More Connecting Points, the Better.

You've probably noticed that I have referenced two or more highs/lows make up a trendline. The reason I mention "or more" is because trendlines can continue to be relevant far out into the future and can be bounced off of several times. As a general rule of thumb, the more times a trendline has been hit and respected with a bounce, the more important the market believes that it is. Like anything, however, trendlines cannot last forever. So after a multitude of bounces, one has to expect a break to eventually occur.

The first reason this is true is that you can draw a line connecting any two points on a chart. Just because there were two distinct highs in the last 50 bars and you drew a line between them doesn't actually mean the line is a valid trendline. What you would have is a potential trendline.

To truly validate a trendline, you need to see the price actually react from a line projected from a trendline drawn based off of two prior points. Essentially, a third high/low is needed to truly solidify a trendline. Once you have this, you can then feel better about looking for opportunities to exploit the market when price reaches the trendline again. While having a third high/low is recommended before looking for a trade, it is not required. Aiming for an entry on point #3 below could work out just fine.

Learn Forex: Validate Trendlines.

(created from FXCM Marketscope 2.0)

Each time you see the price bounce off the same line, the more likely it is that others are watching it too and are playing the same game you are. This could help you get several good entries in a row, but remember trendlines won't last forever. So you want to make sure you set proper stop losses to get you out quickly if the support/resistance trendline eventually fails.

Tip #3 – Buy Bullish Trendlines, Sell Bearish Trendlines.

The trend is your friend! This steadfast rule also applies to trading trendlines. For experienced traders, this basically means we should only look to buy at bullish support lines and sell at bearish resistance lines. For traders not into trading jargon, let the following images below explain this to you.

Learn Forex: Buying Bullish Support Trendlines.

(created from FXCM Marketscope 2.0)

An upward slanting (bullish) trendline means the price has been trending up, so we want to look for buying opportun it ies. Buying opportunities occur when the price drops down and comes close to the trendline that has caused upward bounces before.

Learn Forex: Selling Bearish Resistance Trendlines.

(created from FXCM Marketscope 2.0)

A downward slanting ( bearish ) trendline means the price has been trending down , so we want to look for selling opportun it ies. Selling opportunities occur when the price moves up and comes close to the trendline that has caused downward bounces before.

Trading only in the direction of the trend well let us exploit potential trendline bounces as efficiently as possible. And while they won't always give us winning trades, the trades that are winners should give us more pips than had we been attempting to place trades against the trend.

(Note: There is also the potential to trade a break of a trendline rather than a bounce, but that is a more advanced technique. This is something to be covered in a future article.)

Connecting the Dots.

Coming full circle, trendlines are a very simple tool to use. You are connecting dots on a chart. But hopefully the 3 tips above will help you take drawing trendlines to the next level. Make sure that the lines you draw are connecting two or more highs or two or more lows, but have not been broken by the price between those points. Remember to look for at a 3rd bounce to validate a trendline. Also, make sure you are taking advantage of trading with the trend by looking for buys in bullish markets and sells in bearish markets.

Overall, I hope this makes you more confident in drawing trendlines. Good trading!

---Written by Rob Pasche.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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Past performance is no indication of future results.

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Easy Trendline Forex Strategy.

One of the most powerful analysis tools used in forex trading are trendlines. You have two types: upward sloping trendlines and downward sloping trendlines. This strategy shows you how to trade trend reversals using violated (broken) trendlines for both long and short entries including stops and price objectives.

1. Understanding the basics.

Upward sloping (rising) trendlines connect at least 2 support points while downward sloping (falling) trendlines connect at least 2 resistance points on the chart. See illustration below.

Recommended Time frame(s): 1 Hour chart and above.

Trading sessions: All.

Currency pairs: All.

#1 Find and place a downward sloping trendline.

#2 Wait for a close above the trendline.

#3 Open BUY trade.

#4 Place protective stop below the breakout bar.

#5 Draw an upward sloping trendline as the uptrend develops.

#6 Price objective: Exit the trade when the price closes below the upward sloping trendline.

Example trade: EUR/USD 4 Hour Chart (click the chart to enlarge)

#1 Find and place an upward sloping trendline.

#2 Wait for a close below the trendline.

#3 Open SELL trade.

#4 Place protective stop above the breakout bar.

#5 Draw a downward sloping trendline as the downtrend develops.

#6 Price objective: Exit the trade when the price closes above the downward sloping trendline.

3. Trade Results (see chart above)

The first sell trade (1.3293) with protective stop loss at 1.3412 was closed at 1.2974 for 319 pips.

The second buy trade (1.2974) with protective stop loss at 1.2841 is still open.

Binary option Trading +386

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