Hi Traders! In this post I am going to share with you a very important Forex trading strategy, it is called as the “Double Trend Line Principle”. Trend lines have been used ever since there was technical analysis. If something so simple yet powerful is used for years and traders keep using it, it must mean that it works and there is value to it! Trend lines could be your best friend in trading or your worst enemy. It all depends on how you are going to use them!
In this article you will learn how to trade Forex using the Double Trend Line Principle. Accurate, easy to learn and apply, the double trend line principle is one of my favorite weapons! It could be applied to any time frame and instrument. The risk-reward ratio is usually fantastic and the nature of this strategy allows you to ride long term trends in order to extract hundreds sometimes even thousands of pips with your initial entry. So if you are looking for a trend trading Forex strategy, that a beginner traders could adopt into their trading within hours – this is it!
What Is A Trend Line?
Trend Line can be defined in simple words as a line connecting the lows or highs. As you can see in the example below, I have connected the lows, once we connect the lows we get an uptrend line. In this case the trend line acts as a Dynamic Support for us.
For those of you who has a little experience in trading might have known that the support and resistance, in their nature of form are flat ones and we connect the highs and lows, wherever the price stopped and respected a certain level or zone. This is how we get horizontal support and resistance.
Trend lines more or less represent the same thing but with an angle, when we connect the lows and highs, we get a trend line. This is also one of the easiest way to determine the trend direction. The trend line which you see in the above chart where it connects the lows is called as an uptrend line. Whereas the trend line which connects the highs is called as a downtrend line which can also be called as a Dynamic Resistance, you can find an example of downtrend line in the image below.
Divergence Basics
Divergence appears when there is imbalance between the price and the indicator. Divergence basically tells you that the current market momentum is starting to get exhausted. Once this happens we might expect a potential reversal or at least a pullback. We spot divergences using oscillator/indicators like MACD, RSI, Stochastic, etc…. (In our Traders Academy Club we mainly use MACD and RSI because based on our analysis and research we felt that these are the two indicators which are very reliable).
The idea here is very simple, in a bullish trend when the chart is creating higher highs but the indicator shows a slowdown and making lower highs, this is a bearish divergence and hints that the chances are from here to the downside. The bullish divergence is exactly the opposite, that is in a downtrend when the market is making lower lows but the indicator makes higher lows and basically hints that the chances are from here to the upside, this is the brief view.
Here is an example of bullish and bearish divergences. In the below image where the price was moving up and you can see a bearish divergence was created and then the market moved down. Then the price created a bullish divergence and the price is moving higher.
We have a similar story below with the bearish divergence. We had an uptrend line and the price created higher highs whereas the indicator created lower highs which means we have a bearish divergence and we may then expect a down move.
Note: If you want to learn more in-depth insights about divergences, you can benefit greatly from the videos on my channel here while also embarking upon Divergence University for comprehensive divergence education.
Most Reliable Trend Lines For Entry
1. The first thing that we are looking for in a trend line is an ABCD pattern ( 2 waves), in other words two waves up or two waves down.
2. The next very important part is to get divergence between between B and D, that is between the highs in an uptrend or between the lows in a downtrend.
If we don’t have divergence between B and D then we will be looking for divergence in leg C and D (that is if we have two waves) as shown in the example below.
These are the two possibilities that we can have in terms of divergences when it comes to the ABCD pattern in other words the entry pattern.
Here is an example from the real chart:
In the first example on the left side of the image shown below, we have an ABCD pattern, we have bullish divergence between B and D and then we got the breakout of the downtrend line. This is how the perfect buy setup looks like, we may then go ahead and trade it.
Whereas in the second example on the right side of the image shown above, we have an ABCD pattern, we have bearish divergence between B and D and then we got the breakout of the uptrend line. This is how the perfect sell setup looks like, we may then go ahead and trade it.
How To Take Advantage of The Trend Lines?
The following three important steps are the ones that we use in our Double Trend Line Principle.
- Determine the direction of the market (higher TF)
- Determine support/resistance zones (higher TF)
- Identify great entry levels (smaller TF)
Determine the direction of the market (higher TF):
The first step here is to determine the direction of the higher timeframe. For example if the higher timeframe is the daily chart you may then determine the direction based on the trend line, once you connect the lows/highs.
Determine support/resistance zones (higher TF)
Once you draw the trend line, you will now have your support and resistance. For example if its a downtrend, you connect the highs and draw the downtrend line and now you have a resistance. Similarly if its an uptrend line then you connect the lows and draw the uptrend line and you will now have a support.
Identify great entry levels (smaller TF)
The next step here is to identify the buy or sell setup in the smaller timeframe.
This is how you can break it into smaller steps so that you can access and understand how the big picture of the whole process looks like.
What Is The Double Trend Line Principle?
1. Find a trend line on the higher timeframe.
2. Drop one or two timeframes lower and look for a trend line in the opposite direction of the higher timeframe trend line
3. Once the price is close to the higher timeframe’s trend line, look for entries with the breakout of the smaller timeframe’s trend line.
Here is an example of the Bearish Scenario:
On the left side of the image we have the higher timeframe, the price is moving lower, we have lower highs, lower lows and when we connect the highs we get a beautiful downtrend line. The price is inside the green leg shown in the image and it is moving towards the downtrend line. Once the price is close enough to this downtrend line, we then drop down to the lower timeframe and we start looking for an ABCD pattern, bearish divergence between B and D (if you don’t have it then alternatively look for divergence between C and D leg as I explained earlier). We then draw the uptrend line and once we get a breakout of it, we may then look for sells (Of course we need to check for all the confirmations before we enter the trade).
Here is an example from the real chart:
Higher Timeframe Chart:
Lower Timeframe Chart:
Bullish Scenario:
Next we have the bullish scenario which is the vice versa of the bearish scenario. The price is trending up on the higher timeframe, we have higher highs, higher lows and then we draw an uptrend line by connecting the lows. Now what we wanted to see here is the price to push lower towards this dynamic support (uptrend line) and when that happens, we move down to the lower timeframe and look for an ABCD setup in the opposite direction of the higher timeframe, then we draw the downtrend line and once we get a breakout of it, we may then look for buys (Of course we need to check for all the confirmations before we enter the trade).
Here is an example from the real chart
Higher Timeframe Chart:
Lower Timeframe Chart:
Note: In this case we didn’t have a bullish divergence between B and D but alternatively we had bullish divergence between the leg C and D on the moving averages of the MACD indicator.
How To Trade The Double Trend Line Principle?
TRADING RULES
You will find the trading rules that are used to trade the Double Trend Line Principle
The First thing is : Determine which time frame combinations you are going to trade (higher time frame + lower timeframes).
BULLISH
1. Find a bullish trendline on the higher timeframes with at least 2 touch points.
2. Drop down one or two time frames lower and wait for the price to come closer to the higher timeframe’s trendline.
3. Identify a valid Bullish setup.
4. Buy Entry upon breakout of the trendline.
5. Stop Loss – below last low created before the breakout.
6. Targets
– Target 1 — risk : reward 1:1
– Target 2 — last swing high from the higher timeframe.
BEARISH
1. Find a bearish trendline on the higher timeframes with at least 2 touch points.
2. Drop down one or two time frames and wait for the price to come closer to the higher timeframe’s trendline.
3. Identify a valid Bearish setup.
4. Sell Entry upon breakout of the trendline.
5. Stop Loss – above last high created before the breakout.
6. Targets
– Target 1 — risk : reward 1:1
– Target 2 — last swing low from the higher timeframe.
So traders, this is what I wanted to share with you all about one of the important Forex strategy that we use in our trading “The Double Trend Line Principle”.
Watch the webinar of Double Trend Line Principle
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Also you can get one of my strategies free of charge. You will find all the details here
Thank you for your time reading this article.
To your success,
Vladimir Ribakov
