The Magic Of Trend Lines In Forex Trading + Bonus Trading Strategy

Dear reader,

I will share with you an excellent money making, zero time consuming, 100% stress free, 200% simple, trend lines strategy. Perfect for part-time traders that have to stick to their job during the day and have time to look at the charts from time to time.

As an extra bonus to the trading strategy explained here, I will give away as a gift an Expert Advisor that will help you trade the strategy and automate a big part of an already simple strategy (there is always room to make it better and simpler right?) Just keep reading.

But before I share it with you I want to discuss why trend lines are so important, why they work magically almost every time, and why you can rely on them.

Simplicity is the key to many doors. L. da Vinci said it long time ago: “Simplicity is the ultimate sophistication”.

I like to consider myself as believer in that thesis for the markets as well. A complex strategy is more likely to over-complicate the whole process and probably lead to mistakes. Usually complexity is not a synonym of profitability.  It is vice-versa. The simpler the method, the better the chances are that you are not going to mess up.

Why? Because there is less room for mistakes. It is that simple.

And when it comes to simplicity I think we should start with Trend Lines. They are the training wheels of every new trader. They fall into the ABC category. One of the first things you will most like learn is how to plot a trend line on your chart when you start learning.

So how come something so simple as the Trend Line, is so powerful?

Trend lines just like Fibonacci levels are self-fulfilling prophecies.  What that means in the world of trading is that, when many people believe in the same thing, that thing will turn out to be true. In other words, if many people believe that there is a daily bearish trend line on the way, and the price will bounce from it, many people will place their sell orders right there (or near it, but i will cover this part below with the trading strategy that you are getting today).

This way, the expectation becomes a fact. The more people see the same trend line and levels, the greater the number of traders who will sell or buy there. And now when you think about what I said above, that Trend Lines are part of the ABC in trading, it makes sense right? I’m sure that all of you reading this article, if you had any exposure at all to the markets, will know what a trend line is.

Which trend lines are more reliable and why?

Let’s think about it out loud. For a trend line to be reliable we need more people to see the same thing, and to place their orders there. So next question would be, what are the factors that make people see different trend lines? I’m not going to answer this question. Think about it and see if you can figure it out for yourself.

What i’m going to tell you though is that higher time frames are more reliable. There are a few reasons for that:

1. Banks, investors, hedge funds etc… in summary – “smart money” is usually involved on the higher time frames. They are the market makers, they move the price, so you want to see what they see. You want to respect same levels as they do.
2. Options and cycles are also usually written for longer periods of time. Options play big role in the forex market, so here is another reason.
3. Differences in brokers data feed will not influence that much a daily or weekly trend line when drawn.

 

If you think about it we use trend lines when trading the Forex Patterns. Patterns are build from trend lines. And this comes as no surprise because a Weekly pattern will consist of D1 trend lines, H4  pattern will have H1 trend lines in it and so on… Now let’s go over the strategy that i have promised in the beginning.

If you haven’t already come across this very simple but yet effective strategy I would like to share it with you. It is a great start for novice traders as well as experienced ones. Here it is:

Idea of the strategy:

Idea is to find a trend line on the higher time frames and trade the bounce off of it once the price comes near the trend line.

Rules:

1. Find a trend line on the Daily chart that has at least 2 touching points but keep in mind that, the more spots you have the better.
2. Drop to the H4 or H1 charts and wait for the price to come near the Daily TL and test it.
3. Find an opposite trend line on the lower time frame and wait for a breakout in the main direction.

That’s all. Three simple rules to follow.

Now let’s have a look at the entry rules. I will split them into two categories: Aggressive and Conservative.

Buy Entry Conservative Rules:

1. Wait for the lower time frame bearish trend line to be broken.
2. Wait for price to re-test it and enter with a bullish candle.

Sell Entry Conservative Rules:

1. Wait for the lower time frame bullish trend line to be broken.
2. Wait for price to re-test it and enter with a bearish candle.

Buy Entry Aggressive Rules:

Enter right away, once the lower time frame bearish trend line is broken.

Sell Entry Aggressive Rules

Enter right away, once the lower time frame bullish trend line is broken.

Let’s see an example:

USDCAD D1:

Here is a great example of how the daily trend line in USDCAD was respected the third time in the middle of October 2015. In this case you want to connect the lowest swing point (marked 1 on the image above) with the next low created (2). That’s all. If you had some patience, the trend line was reached after the move up, re-tested, respected and the price shot up. Notice the initial move right after it tested the line. Strong powerful move. Now let’see how things looked on the smaller time frame at point 3.

USDCAD H1:

This is how a conservative buy entry would look like.

If you want to be aggressive, you can buy immediately after the trend line was broken.

Now let’s talk about stop losses and targets.

Stop Loss:

Place the stop loss below the last swing low created on the smaller time frame (h1).

The reason behind it. By waiting for the price to break this bullish trend line, the market is telling us that bulls are here and they are taking control. We place the stop loss below the swing low because this is our higher time frame confirmation (the daily up trend line). We are in a way protecting the D1 TL. If the market decides to break below it, we want to get out and not fight it. So don’t fall into the trap of placing your stop too close as the price might go to re-test the daily trend line again before continuing north which will take you out of a great potential trade.

Targets:

You will split your target into two parts. If you can’t close fraction of your position, just open two smaller positions so you can close one of them on the first target and leave the other part running. Basically if you are trading with 1 lot and you want to close 70% of the trade at target 1, and leave the other 30% running for the second target, you would open two trades 0.7 lots + 0.3 lots.

Target 1: The start of the short term trend line ( in this case the swing high on H1) is our first target. This is where you will collect 70-80% of the trade (you can choose any percentage you want depending on your money management – that could be 50% or 60% etc). This is also the place and time when you will move your stop loss to your entry level, so you will have a risk-free position after you collected your first target. This way even if the price goes against you, you will have some money in the pocked and no-risk to worry about.

Target 2: This is where the fun and big money comes in to play. You will hold your second position until the D1 trend line is broken (broken down in this case). You want to see a daily bar closing below/above the trend line.

 

This trade alone would’ve brought over 750 pips profit. Yes it requires patience but why hurry? Your money is working for you, you are in a positive territory so just wait for it. Let’s crunch some numbers.

The Math:

Say that you are trading a 5k account ($5000). If you are risking 2% per trade that means you will risk $100 per trade. First target in the example above, didn’t have the best risk:reward ratio we could want, it was slightly below 1:2 but still fine (around 1:1.7 depending on where exactly you would place the SL and TP 1).

For this trade you would need to use a lot size of 0.14.

First Target Reached: 150 pips x 0.10 lots (70% of 0.14) = $118

Second Target Reached: 650 pips x 0.04 lots (remaining 30%) = $195

In total you would get over 6% return in 1 trade! Tell me 1 bank that gives you that much money per year? And this is just one trade. Worst case scenario and I really mean worst case is that you find one good trade per month. You can easily make 50% per year (considering losses) with this strategy on the go. It could be an addition to your other trading methods, it could be your main system, it doesn’t matter.

Let’s summarize what you had to do. Go over the daily charts. Find a trend line with at least 2 touching points. Wait for price to re-test that line and enter with a simple break out on the smaller time frame. Can it be easier than that? I doubt it. I’m not inventing the wheel here. You may find thousands of variations of how to trade trend lines but this is one of my favorites i’m sure you will love it, as long as you follow the simple rules.

Remember to keep the big picture in mind. Patience and consistency pays off.

 

And now last but not least, the EA that I have promised as a gift to help you trade this great strategy! I will send you the EA to your email address, just go to my facebook page by clicking HERE (I will really appreciate it if you hit the Like button on my page – thank you) and share your comments, thoughts, ideas about this article and strategy in the last post you will see on my page. But most of all don’t forget to leave your email so I can send you the gift!

 

If you like this post please like and share it with your friends! Enjoy the holidays and happy trading!

 

Yours,

Vladimir

 

 

 

 

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