Trading with the Trendlines

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Trendlines are one of the mainly used tools of analysis. As a tool of analysis, trendlines can be considered to be dynamic or adaptive support and resistance levels that adapt to trend to find control points on either end of the channels or trend breakouts.

Numerous tips can be used to refine how trendlines positively affect your trading. Initially, trendlines are confirmed after at least three bounces off the trendline level. Although some traders may use two hits to realize a tentative trendline, having three hits not only confirms the trendline but reaffirms its strength with each bounce. In other words, the more the price bounces off the trendline, the stronger the trendline can be considered or relied upon. At the same time, using numerous confluences such as candlestick formations and indicators can confirm the move.

For example, in an uptrend – a bullish engulfing candle on the trendline can bound the entry of the trade with more than one factor. In essence, the stop-loss lies outside the bounds of the trendlines especially necessary in the event of a trend breakout. It is within this context that fake-outs or false breakouts can be considered as well.

Just like the basic rules of support and resistance trading especially within a rectangle, false breakouts can be considered as the action whereby the price may temporarily break the support or resistance level mimicking a breakout, only to reverse back into the channel. It is important to keep an eye out for large wicks which may be the first clue to a false breakout. It is also vital to wait for candlesticks to close before making this determination. Once the price shifts back within the trendlines, a false breakout can be confirmed.

As mentioned above, tools that can be used to strengthen or reaffirm entry levels when using trendlines include indicators such as the Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD). At the same time, the use of Fibonacci retracements can highlight possible entries and profit targets. This is because Fibonacci retracements use the swing high and swing low to plot out the relevant retracement levels. When trading with a trend, finding the swing up/down can result in identifying possible retracements, continuations and extensions.






Nairobi School Of Forex

Nairobi School Of Forex

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