The trendline reversal trading strategy rests on the premise that most of the price action in the FX market forms trendlines and is contained by trendlines. As we’ll see in the examples later, as one trendline breaks another one forms and so on. It’s a continuous process actually.
Advantages of the Trendline Reversal Strategy are:
The essential idea of this strategy is: Just follow the trendlines!
The trader should constantly monitor both the support and resistance trendlines and redraw them as the old ones break and new ones form. When an intersection of the projections happens, one of the trendlines must be broken and the other will most likely continue to hold the price. We trade in the direction of the trendline that remained unbroken.
Entry rules of the Trendline Reversal Forex Strategy:
The following chart is a perfect example that highlights the philosophy of this trading strategy. Basically, we are constantly monitoring and drawing trendlines, and judging by the changes in the slope of every new trendline we can determine how likely a reversal is at any particular point in time.
In this case on the AUDUSD 4h chart, it was pretty clear that a reversal was imminent and we could have timed the entry to catch a nice profit of the move.
AUDUSD was making higher highs on this chart, however, upon closer inspection, we can see that the slope of the upward, support trendlines underneath was decreasing until it finally turned flat horizontal before the bearish breakout.
More importantly, a very steep resistance trendline formed from the top that finally caused the breakout and is used as the stop loss point for this trade.
Initial stop loss placement of the Trendline Reversal Forex Strategy:
After one of the trendlines is broken, and we enter the trade in the direction of the healthy trendline the protective stop loss is placed behind the healthy trendline.
The next chart is another example of how this strategy works.
After the downward trendline was broken the price didn’t continue up immediately but first retested the broken trendline from the other side. In this case price action didn’t just confirm the breakout of the old trendline but it also confirmed the formation of the new upward trendline – based on which a trade is taken according to this strategy.
Stop loss management – trailing the stop
It’s only logical that after we enter a trade based on a trendline we should trail the stop behind that trendline. Basically, as long as the trendline holds we want to be in the trade and as soon as it’s broken we want to be out of the trade at once.
Take Profit of the Trendline Reversal Forex Strategy:
Unlike the entry, we don’t have to wait for a break of the trendline to exit the trade. In fact, in order to capture maximum profits, you need to exit at some technical level before the price takes a turn and reverses.
For this purpose, it’s best to lock in profits at a prominent technical support or resistance level, or a Fibonacci confluence zone taken from the higher timeframes.
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