Today we will present you an interesting strategy for options trading that will help you identify the most convenient places to open a position. The strategy uses 2 simple technical analysis tools. They will show you the exact place to enter the trade.
The method explained in this guide has been widely used by options traders for years. It is called TLS what stands for Trend Levels Signals. The strategy was once described to me in an e-mail by our reader. The method has great potential to generate profit. With our guide, you will quickly learn how to use this strategy. Test it on a demo account, and when the results are satisfactory you can further use it with real money. The strategy we have described works for many options brokers. We will, of course, present it on the Olymp Trade platform.
Our observations show that the strategy works best on very liquid assets. That is why I chose EURUSD as the most liquid currency pair for the purposes of this article.
Ready? Let’s get started!
- 1 Key elements of the TLS strategy
- 2 How to apply TLS knowledge in practice?
- 3 Money management that will turn $100 invested into $249
Key elements of the TLS strategy
In order to enter the position, each time we will need three complementary components. Firstly, we need to be able to identify the current upward or downward trend. Secondly, there must be horizontal support or resistance levels on the chart that have previously been tested by the price. The last condition necessary to enter the trade is the so-called trigger. The trigger will be based on the price behaviour that we can read through the candlestick patterns. A good trigger can be a pin bar, a large body candle or other candlesticks pattern. It is about getting the right momentum to open a trade.
TLS strategy for EURUSD 5m
Take a look at the chart below. Is there anything interesting in it? You can see even with the naked eye that there was an uptrend in the five-minute interval.
You can draw all kinds of lines on the chart using the Trend Line. You can use it to mark trends as well as to draw horizontal support and resistance levels. The RSI(14) is also shown in the above chart, but we will talk about it later on. Both Trend Line and RSI can be selected from the menu available by clicking on the compass icon in the upper left corner of the platform next to the instrument name.
Finding convenient places to open a position
There are two things you need to be able to identify on a chart. These are trend lines and horizontal support and resistance levels. The upward trend line should provide support for the rising bottoms. For a downward trend, the line should be a barrier to descending tops. In both cases, we have to lay the line on at least 2 turning points (otherwise it is impossible to draw a line).
Horizontal support and resistance lines are based on the turning points of the price chart.
The following scheme shows the existence of a trend. The black line is an upward trend line that is broken.
The market very often replicates this pattern. You can say that these are repetitive cycles, of course, the structure on the chart may look a bit different, but the main idea is always the same. The market moves in an upward trend, creating higher tops and higher bottoms. When the price breaks down the trend line, it is the first symptom of a shift in the direction. Another sign that the trend is reversing is breaking the support given by the previous bottom. Be aware, however, that sometimes this can only be a deeper retracement or consolidation pattern before the upward trend continues.
RSI – why do you need this oscillator?
The Relative Strength Index is an oscillator with a value range from 0 to 100. It is assumed that a market above 70 is bought out and a market below 30 is sold out. Its application helps to identify a trend reversal. RSI is also useful for filtering false signals.
Local support and resistance levels – don’t be afraid to draw them!
I encourage everyone to treat the chart as a testing ground. Practice in using technical analysis tools always gives you a broader view of the market. Therefore, do not be afraid to draw. Draw horizontal levels of support and resistance and then observe whether the price will react with these levels. Below is our EURUSD with local S/R levels.
Some price levels are reactive once, others are more significant support (2, 6, 8) or resistance (1, 3, 5, 7). The breakthroughs of these levels and their sequence indicate the strength of the trend.
I’ve added extra lines to the graph below. Do not feel overwhelmed by their number. My objective was to show you how important it is to practice drawing on the chart.
I have added some trend lines. Trends have this in common that their dynamics are not constant. Look at the trend line number 1. You can see immediately that on the intraday scale it is difficult to expect that the growth will continue at that pace. The trend line was broken, but the previous support level before the breakout survived the test.
Trend line number 2 was defended three times. In the end, it was broken. Note, however, that a significant level of support was not broken. Lines 3 and 4 are dynamic reaction lines. I drew them to show you that they both come together in the shape of a triangle. We know from the theory of technical analysis that a triangle can be a pattern of trend reversal or continuation. It all depends on the direction of the breakout. Here we have a knockout and therefore it is quite an important signal that we may soon be dealing with a reversal of a dominant upward trend.
How to apply TLS knowledge in practice?
TLS trade example #1
Let’s zoom in a little on the trend number 2 described above. Look at the chart below:
The price touched the trend line three times. The market climbed the peaks. The horizontal line is price resistance. The consolidation and bullfight against bears can be clearly seen there. The price drops slightly, approaching the trend line. It is where the decision about the future price direction is made. A strong upward trend candle breaks the existing resistance. This is a fantastic signal to open an option for a price increase in the next 5 minutes. Effective analysis and profitable trade.
TLS – more trade examples
We’ll start with the naked chart again.
And again we will add horizontal lines of support and resistance. Lines 1 and 2 limit the price movement in the rectangle. You can read about such price boxes in our article. Number 3 is only a small local bottom. Line number 6 is interesting and noteworthy. Note the change in the role of this line. First, it is a support and then, after it is broken, it becomes a resistance level. I am writing about it because such situations are encountered on charts often and on their own can be used to construct an effective strategy.
In the next step, we will add a trend line.
Our trend line starts at the last top of the rectangle’s upper limit. RSI slowly crawls down below the central line of the oscillator.
When the local support I mentioned was broken, the price went back and once again tested the trend line (1). The candle that touched the line has a very meaningful shape. A pinbar with a narrow body, which shows the strength of the sellers. At the opening of the next candle, you can open a 5-minute option for a price decrease.
Situation number 2 is attractive because the price has broken the important bottom before the next trend line test. The red candle signals a return on the line and we have another trade for a price decrease.
Situation number three is the best. A red candle breaks through the price support by covering the preceding consolidation with its body. So what do we do? We are selling again!
After a significant downward movement, the price returns to the trend line again. It reaches the trend line in a fast motion. These are only 2 green candles. The third candle, which touches the trend line with the upper shadow, is no longer so dynamic. The small body and the relatively long shadows once again show the strength of the sellers. Aggressive entry could take place already at the opening of the next candle. If you are waiting for a more confident signal, it is certainly the next strong red candle.
Money management that will turn $100 invested into $249
Imagine a situation in which after winning the first trade, you open new positions with earned money. Your initial investment returns to your account. Such a solution is possible. If you have practised solidly in TLS, you can experience a series of profitable trades. Then you can use the money management model presented in the table below.
How does it work? In the first trade, you invest $100. If the trade is profitable, $100 returns to your account and $82 of profit will be the investment amount for the next trade. If the second transaction turns out to be loss-making, you will lose $82. If it also ends in a profit, invest the profit from the previous one, i.e. $67.24, in the next one. If everything goes according to plan, at the end your initial $100 will turn into $249!
And remember, training makes a master. So practice and practice again. You can use your demo account on Olymp Trade to practice.
We wish you profitable trades!
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