Trendline Break Forex Strategy

Screen Shot 2014-06-17 at 11.12.19


Video Transcription:

Hey, traders. Welcome to video 7 of the Advanced Forex Strategies course. This is Cory Mitchell. In this video, we are looking at the trend line break strategy. We can use it on all time frames, brought to you by So, trend trading, as I say in every video, is where the money is. There are multiple ways to take trend trades. Typically, I use this strategy to tip me off about potential trades, and then use one of the entry methods described in prior videos, and we’ll review a couple of those.

At this point, I would like to say watch all the videos because we will build on certain things that are discussed. I’m not going to review every element in every video. So, we’re building on certain entries that we’re going to use. Our targets, you’ve noticed are quite similar in a lot of the videos. So, we’re going to build on all this stuff. So, if you haven’t watched all the videos, you should be going through and watching each of them. As always, this strategy provides a low risk relative to reward. We are going to be making more on our winning trades than we do on our losing trades, and as mentioned we can use it on all time frames. So, that includes when you’re using a one-minute chart, five-minute chart, hourly chart, daily chart.

We trade in the direction of the trend. In this case, we are betting on a probable new trend, so this is a reversal strategy. A trend line break is when we’re trending in one direction, that trend potentially breaks, so we’re taking a trade in the new direction. There must be evidence other than a trend line break to support the reversal, though. So, we’re looking for a higher low, a lower low depending on whether we’re looking at an uptrend or a downtrend. With this strategy we can set and forget. There’s no touchy-touchy. Again, let the math do the work. We’re going to make more on our winning trades than our losing trades, so once we set that trade, once we get in there, let it hit your stop or target.

So, first off for an uptrend, we need an uptrend where it is neatly defined by a trend line, meaning the trend line highlights the rising lows. It doesn’t have to be exact, but we want to be able to see that trend line fairly neatly defines the uptrend. The trend line then is broken. Remember, this is just a tip off. It’s not an entry signal. The trend line is broken, and the price moves steeply lower. So, we were moving higher in a nice uptrend. Then we have this sharp reversal after the trend line break, and ideally it reaches or exceeds a prior swing low. So, during the uptrend we had rising swing lows. Now we have our first either matching low or a lower low plus the trend line break.

We wait for the price to move back up. So, we were in an uptrend, we had a move lower, and now the price is starting to trickle back up. This is when we look for our entries. We are betting on further downside. In other words, we are betting that the uptrend is reversing. So, we can use our Fibonacci entries. 61.8 and 78.6 are the ones I recommend for this strategy. We can also use our pocket strategy. So, those were covered in the last two videos.

Alternatively, we can sit there. If we don’t just want to put out orders ahead of time, we can sit there and wait and see if we get a pause. This was covered in the trend… I forget what I called it. I think I just called it the trend trading video, where we’re waiting for a pause and then a breakout. So, we’re going to place our stop 5 pips above the uptrend high. It’ll be a little bit different if we actually sit there and wait, if we use this entry here where we actually sit and wait for the pause. Then we can put our stop 5 pips above the consolidation.

No matter which entry method we take, and even if we take multiple entries at different prices, they are all going to be 1.6 times the risk. So, you may have three different entries with a 10-pip stop, a 15-pip stop, and a 20-pip stop. Multiply each one by 1.6, and that’s going to give you your target for each one. So, this is conservative. We are going against longer- term trend. This is why we don’t go for more on this one. We’re still making 60% more on our winners than on our losers, but we don’t want to stay in these trades for too long. There are other trades that we can extract more out of. This one, we’re betting on a reversal, but we’re not 100% sure yet. So, this is why we just take the 1.6.

Even if we’re taking multiple entries, which I do recommend, we only risk 1%. So, this should be a staple now that you understand through all the videos, we only risk 1% per trade. We will be selling into buying. Remember we are betting on the reversal of an uptrend, so we are short selling. We’re selling as the price is rising into us. We had this nice uptrend, we were moving up, we had a deep pullback. Now we’re pulling back higher again, and we’re going to go short, expecting the price to continue lower.

For a downtrend, we need a trend line that neatly defines it. The trend line is just a tip off, remember. We’re looking for it to break and the price to move steeply higher. Ideally, it reaches or exceeds a prior swing high in the uptrend. So, we wait for the price to start to move back down. Then, we can throw out a Fibonacci tool. Look for entries at the 61 and 78.6 retracement levels, or we can enter along with the pocket strategy, or we can wait for a pause in the pullback, pause in the selling and then trade a breakout back to the upside.

So, in this one, we had this downtrend, sharp move higher, we’re moving back down, and we’re looking to buy in anticipation that that downtrend has been broken and we’re going to move to the upside. So, 5 pips below the downtrend low. Once again, if we’re using the active strategy and entering after this pause, then we can put the stop 5 pips below the consolidation. Risk is 1.6 times our risk. We don’t know if it’s a full reversal yet. All we’re thinking is that that trend line, the downtrend has been broken short term at least, so we’re probably going to see a bit more uptide. That’s what we’re going after.

Risk is kept below 1% for all trades, and on this one we will be buying into selling. But, the sharp move indicates that the downtrend is in trouble, so we’re likely to see some more profit to the upside.

Okay. So, I got one set up here in the British pound/U.S. dollar. So, we have this move lower. If we look at this a little bit longer term too, we can see that we are moving within a trend channel. So, when we get down here, this is a nice trade. So, we see downtrend broken. Let’s just get rid of this again for now. So, moving in a downtrend, we can see that it is defined by a trend line. Like I said, it doesn’t need to be perfect. We have some spikes above it. That’s fine. The point is that we can see that this is clearly broken. We have a definite shift in momentum here from to the upside compared to what was going on here.

So, we have this move above. No real pullbacks immediately following the breakout. Plus, like we said, we need further evidence that this has actually broken. So, we are looking for, in the case of a downtrend, we need a higher high. So, that does not happen until about this point right here. At this point here, we have broken above these former highs and we have broken the trend line. So, this is where, once we start to pull back from this level, that is where we would pull out our tool.

And if we wanted to use this entry method, we would be looking to place orders here at this 61.8 and here at the 78.6. Now I can see that the market didn’t actually pull back to that. Of course, we wouldn’t know that in real time. All we can do is throw out our tool and place our orders right there and right there. So, as we can see, in this case the market doesn’t touch it. There is no perfect entry. Do not think that you’ll be able to get into every trade. I recommend that you pick the entry methods that you like. That’s why we covered several different ones in videos. I’ve found that they all generally work the same. It’s just your personal preference.

Some you can set and forget. In my case, I like to put out orders and go to bed, and wake up in the morning and they’re filled. Others like to actively trade. I did that for 10 years. I’m not interested in sitting in front of my computer all day, so I no longer look for those trades. But it is viable, and here you would’ve gotten that signal.

If you had waited for the pause, you would have got one right there. In the first video we’re looking for a four-bar pause. We have one; one, two, three, four, five, and then we had this pop higher above it. Now, you would’ve had your stop below this low at that time, pops higher. It comes all the way back. You wouldn’t have got stopped out, though. Alternatively, if you had missed that entry, there was this other consolidation down here where you would’ve traded the pop above.

So, let’s go with that one. Let’s say that you missed that trade, or we also had a news announcement right here, so you may have avoided taking the trade right before that, so you waited for this pause. At this point, you were looking at the risk. Remember for this strategy, we can put it 5 pips below the consolidation low, so it would have been right about the bottom of that. We’re entering on the breakout above, so we’re looking at about a 32.4-pip stop, and on my little tool there you can see a 324. That means 32.4 pips.

So, 32.4 times 1.6 is 51.8. So, right, we’re entering right there. 51.8 pips would have been right about there. Right, so as you can see we’re getting out on a move higher. We do not know that that’s going to fly higher. In hindsight it looks like, oh, we could’ve taken a lot more out of that, but we do not know that. We do not know that this low is the one that’s going to launch it. This could have very easily moved it up to here, channeled around. We do not know this is coming. Get rid of that notion that we can predict big moves. There’s no reason to. We make more on our profits than our losses. We trade in terms of mathematics, and that is it. We trade probabilities.

So, here we have a very good chance being able to get out of this. It’s below the former high. Typically our targets, if we had a little bit shallower pullback, we’ll see we’ll be right around the high. So, we’re not betting on this major move simply because even though we have some evidence that the trend has reversed, we are fighting a longer-term move.

Here, I noticed one. Let’s just go over here for a second because we have one occurring right now in the British pound/USD. So, we have this trend line here, very steep, and we had a breakout above. Once again, we’re waiting for a former high to be breached. It breaches it here, so now we can potentially set out orders here, here, or if we were waiting for the pocket strategy, our order would be down, well right in line with the 78.6. We’d be looking to get in down here, stop down here, and once again, even if we take entries here, here and here, each one will have our risk 1.6 times. So, whatever our risk is on the individual trade we put out an order for that.

So, what would be our risk here? Seventy-two pips plus 5, so we’d be looking at about 77 pips of risk there. Seventy-seven pips times 1.6 will give you your target for that one. On this one here, we’d be looking at about 45 plus 5 pips. About 50 pips. So, 50 pips times 1.6 would give you your target for that entry. So, even though we’re taking multiple entries, we don’t get all out at the same target. For each risk level, multiply by 1.6. You’re going to have targets staggered up here, and they’re generally going to be below this recent high, so that even if this pops back higher but fails to make a new high, you’re still going to be out of the trade simply because we are fighting this downward momentum still.

So, let’s look at a downtrend. Here’s a bigger move, long-term downtrend. We can see this last wave lacked a lot of strength compared to this one. This one is just relentless. This one falls a little bit, pauses, and then reverses. Let’s change the time frame on this to be hourly. So, we can see, pop higher. We make a new high. So, this high is higher than the last high in the downtrend, so we have a potential trade here. Once again, we can use our Fibonacci entry if we so choose. Orders at 61.8, we would have definitely been filled on that one. 78.6, wouldn’t have been filled on that one. And if we used the pocket strategy, our order would have been right down here at about the 78.6 level, and that wouldn’t have been filled either.

If we switch to the half-hour again, we can see there is no pause at the bottom here, so the waiting for a pause strategy would not have worked here. So, basically like I said, there is no perfect entry that is going to work for every single trade. This one, at least you would have gotten the one trade at the 61.8% level.

So, for that one our entry point is 61.8. Our stop is 5 pips below the recent low. So, we’re looking at about 17 pips there plus 5. Looking at about 23 pips. So, 22 times 1.6, 35.2. So, 23 pips of risk to the downside, we are entering here 35.2. So, our target would have been right about in that area there. Say that we had been filled on this 78.6. In that case, we’d be looking at about 9 pips plus 5. So, we’d be looking at 14 pips of risk times 1.6, so 22.4. So, from this point here, 22.4, right about there.

Right, so you can see the staggered entries, different targets based on where we’re getting filled. And that way, if we get just a bit of a surge up and this stalls out and collapses like it did here, yes, we had a little bit more upside. But, basically it collapsed, and this is why we take the targets just at 1.6, so that if this happens we’re out of our positions and we can move on to another trade. So, pretty conservative, but we still are making more than our risk.

A couple different ways to enter. Like I said, you’re not going to find one that works every single time in terms of being able to get positions. The market, it just doesn’t work that way. It’s a little more dynamic. But, using the Fibonacci, you’ll typically at least get one entry. Waiting for the pocket or the 78.6, you’re going to get a better price but you’re going to get it much less often.

So, things to keep in mind. Every trade has a stop and a target. Put these orders out when you place the trade. Only risk 1% or less of your account in one pair, and that includes taking multiple positions. That way, even a string of losses won’t significantly draw down your account. We only trade in the trending direction. In this case, we are betting on a new trend, but we have evidence to suggest that that’s occurring.

Place a stop 5 pips below the recent low for a downtrend reversal. Place a stop 5 pips above the recent high for an uptrend reversal. If you’re waiting for the pause to enter, you can put the stop 5 pips outside that consolidation.

Target is 1.6 times our risk. We do not deviate from that. Do not try to make more than that simply because we are going against a bit of longer- term momentum. Optional, reduce risk to break even on remaining positions once the first target’s hit. So, if you do have multiple positions out, you can reduce those to break even once your first target has been hit.

Trading involves substantial risk of loss. Only trade with capital you can afford to lose. Test out strategies before using them to make sure you’re actually able to implement them. Being able to see these things in real time is very different than watching a few examples on a video. So, pull out the demo account, make sure that you can actually do these yourself in real time. Be able to put out your orders, calculate your targets, your stops. And until next time, happy trading.


More About

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

View Posts - Visit Website

Comments are closed.