Trend Trading – How to Trade With Trendline

Introduction

Today we are going to talk about the most important and most simple element in trading and investing (in liquid asset):

…The Trend – Trend Trading.

Did you hear the phrase like “trend is your friend”. 

Trend is like the flow of the price.

When the market price increasing and forming a new trend, the price tend to continue the similar speed and keep increasing until certain level.

As trend is very important to traders, learning the trend trading method is a MUST to the new traders.

So…

 

Basic of Trend Trading – What Is Trend

In trading or investing, trend is mean by the market price is flowing to the same direction consistently in certain period of time.

Either consistently moving up or moving down.

When the market price trending up we called it bullish; When the market price trending down we called it bearish.

See the diagram below to have the idea.

Trending Up – The Bullish

Trend Trading
Diagram Shows The Market Price is Trending Up – Market Is In Bullish.

 

Trending Bullish
Diagram Shows The Example of Higher High & Higher Low

When it is Trending Up or Bullish, it will tend to have higher high and Higher low.

What do I mean by that?

Refer to diagram above…

Point 1, 2 and 3 is the highest of the price can go before the price goes down.

Mean while, point 2 is higher than point 1 and point 3 is higher than point 2.

So, the points of 1, 2 and 3 are the higher high of the trend.

It is the same with Higher Low. the Point A, B and C are higher each time they retrench.

Next!

For the comparison, we look at the…

 

Trending Down – The Bearish

Bearish Trend Trading
Diagram Shows The Market Price is Trending Down – Market Is In Bearish.
Trading Down - Bearish
Diagram Shows The Example of Lower High & Lower Low

I will explain shorter at here, since it is only reverse as the Bullish.

From the diagram above…

Point 4, 5 and 6 is the recent high of the market price before the price retrench. The recent high get lower and lower and we call this a Lower High.

Same thing happen at the point C, E and F. They flow lower and lower. 

Thus, they are called Lower Low.

okay.

 

How To Spot A Trend?

Some of the traders can observe the trend by not even using a line. But for me personally it is very confusing.

So it is advice for new trader to use some of the tools for trend trading.

I suggest to use these two tools which are Moving Average or a line. These two are the most popular and simple tools.

At here I will show you can use a line to draw the trend out.

How To Draw A Trendline

We can use a line to link minimum two recent low of the price together to form a trend. In opposite direction, we also can link the recent high of the price together and form the trend.  

Trendline

Diagram Shows the Example of Trendline (Red Line).

 

In the diagram above, I linked the recent low together and form a trendline. From the trendline, we can know that the trend is a bullish.

Most of the time, linking two points to form a trend is not effective enough. The trend might be a “fake” trend, there will be a large chance that the trend you draw is not the real trend.

So you need to wait for the confirmation – the third touch of the market price on the trendline. It is shown in the diagram above.

How about the bearish trend?

well, it is just exactly opposite as the bullish. An mirror-action of it.

So I will not give an example in here. (Not because I’m lazy, LOL.)

Forecast The Market Price

When you want to forecast the future trend, just extend the trend line. Then the extended trendline will be the estimated level for the trend goes. 

Using example from previous diagram, we can extend the trendline after the third time the price touch the trendline.

Then we will have the forecast level of the market price.

Now, you can know that you need to buy(long) and no to sell(short) it with suitable stop-loss and profit taking level.

Riding A Trend

As a trader, trend trading mean the ability to ride a trend.

That is all about for the trend trading strategies. Analyze it, forecast it, then riding on it.

If you enter a trade after you spotted a trend, and the price fall directly after that,

you won’t have to be so worry as long as your stop-loss is placed correctly. The price will normally retrench a bit and continue the direction of the trend. 

So, it is important to know how to spot a trend and make good use of a trend line.

Still, you need to place your stop-loss in case the trend did not flow as you think it would. Since there is no trend will always flow to the direction as you think it would be.

 

Trendline “Zone”

In many cases, the price will not fall on the trend line perfectly.

Sometimes it will cross a little and sometimes it will left a gap after the price “bounce”.

This will be happen where we have no control, but we need to know that when the price near to the trendline, it tend to enter the “zone”. 

The “zone” is the area that testing the strength of the price. The price may tend to “bounce” or break the trend line when it enter the “zone” but not touching the trendline.

You need to bare in mind that the price may change the direction or trend when it enter the trend line “zone”.

Trendline Zone
Diagram Shows The Zone In The Trendline.

 

Combination Of Trendline With Price Pattern And Other Indicator & Oscillator  

With using the trend line, we can draw out different pattern and these pattern tend to repeat in the market. We will talk about the patterns in the other post. 

Everything in the market tend to repeat itself in similar pattern, if we can catch the pattern, we can spot the trend and trade with higher winning opportunity.

Beside that, the combination of the trend line can also cooperate with other indicators and oscillators to act as a confirmation before entering a trade.

Using trend line with moving average also giving use a big guidance on the trend flows, confirmation of trend and help to decide the entry timing.

 

Trendline In Multiple Time Frame

When drawing trend line, we can draw a different trend line at different time frame. Sometimes when we see the market is bullish, but in the other time frame may show bearish.

What is that mean?

Please look at the diagram below.

Multiple Time Frame
Diagram Shows Forming of Trend In different Time Frame.

Diagram Above example is showing the same currency at the same time with different time frame.

So when you think the trend is going down, but in actual it is going up.

Drawing trendline and identify the trend in the larger time frame may help you to spot the bigger trend with stronger resistance & support level. 

By doing this, it will ensure you won’t be easily wiped out by the bigger trend. 

Larger trend will be stronger than smaller trend. Remember this.

Before using multiple time frame to analyze, please make sure you are already used to single time frame analysis.

It is because you may have information overload when you are not used to it. 

So for beginning, make it simple.

 

Conclusion

Learn how to use trendline to identify the trend is a must for traders. It is because many technical analysis is based on this method.

Know how to draw a good trendline not only let you identify a trend, it also let you to identify the support & resistance level of the market price.

For new traders, you must trade with the trend not against it.

Trend trading system is the simple to learn system for a new trader. just remember 3 words (AFR):

  • Analyze
  • Forecast
  • Ride

When you used to analyze the trend on single time frame, try to analyze together with higher time frame trendline.

So, new traders, I challenge you to learn trend trading!

and be good at it.

 

Thanks for spending your precious time together.

Let us grow and learn together.

Cheers,

Jordan V.

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