Traders use the help of many different tools to conduct an accurate analysis of the market. One of such tools is a trend line. It is the line drawn on the chart that indicates the incline on a sequential series of candlesticks. The trend line may form the basis of the trading strategy. And today’s article is about using the trend lines to trade pullbacks on the Olymp Trade platform.
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Drawing the trend line on the price chart
A trend line is a line that connects lows or highs of the price. If the price forms low, next high and a higher low afterwards, you may join the lows, and you will get a trend line that indicates the upper movement of the price.
Through the downtrend, the price will form high, next low and then lower high. You will receive a trend line by connecting the highs.
Trading with the trend lines
You can use the trend line to find the best points to open your trading position. You have to wait for the candle to touch the trend line for the third time. Buy during the uptrend at the third touch of the trend line by a candle and sell during the downtrend.
Consider the picture below.
The first situation shows the uptrend. Points number 1 and 2 help you in drawing the trend line. The third point is where you should open a buy position.
The downtrend is represented in the second situation. Similarly, points number 1 and 2 are used to identify a trend line. Open a sell position when the candle touches the line in the point which is described as number 3.
To confirm your position search for additional candlestick patterns such as engulfing candle or wicked candle.
Pullbacks strategy for long trades
See the exemplary chart below. You can see the low on the chart. Then the price is rising and after some time it creates a higher low. Connect the lows, and you will get a trend line. Now, wait for the pullback to the trend line. Did you notice this strong bullish pin bar (3)? This is a perfect point to go long.
Place stop loss below the pin bar that has formed on the trend line. Target take profit at the previous high level. The higher reward to risk ratio the better.
Pullbacks strategy for short trades
To open a short trade you should wait for the downtrend. Look for the high, then low and then lower high. By connecting the highs you will get the trend line. Your task now is to observe the chart and wait for the pullback to the line. In our example below, the bearish engulfing pattern appeared on the trend line. You should open a short trade here.
Set your stop loss just above the engulfing pattern. Take profit should be set at the level of the previous low. The reward to risk ratio is quite favourable again.
Pros and Cons of Using Trend Lines for Trading
- ✅ Helps identify market trends
- ✅ Provides potential entry and exit points
- ✅ Can be used in conjunction with other analysis techniques
- ❌ False breakouts can occur
- ❌ Requires subjective interpretation
- ❌ May not work well in volatile markets
Comparison of Trading Strategies
|Trend Lines||Identifies market trends, potential entry and exit points|
|Moving Averages||Smooths out price fluctuations, indicates overall trend direction|
|Support and Resistance||Identifies price levels where buying or selling pressure may emerge|
Trading pullbacks with the trend lines is a quite simple strategy. Just follow a few steps and you will master it in no time.
First, draw a trend line by connecting lows or highs on the price chart.
Then, wait for the pullback to the trend line and additionally for engulfing pattern or wicked candle.
Next, set stop loss and take profit. Estimate reward to risk ratio. You want it to be considerably high.
Practise using the pullbacks to the trend line strategy on the Olymp Trade demo account. This account is free of charge and supplied with virtual cash. It allows you to try new strategies in a risk-free environment. Once you are confident in using pullbacks in trading, move to the live account and earn profits. Tell us in the comments section below how you like today’s strategy.
Frequently Asked Questions
- Q: How can I draw trend lines accurately?
- A: Start by identifying significant lows or highs in the price, then connect them using a straight line.
- Q: Can trend lines be used in all financial markets?
- A: Yes, trend lines can be applied to various markets, including stocks, forex, and commodities.
- Q: Are there any alternative tools to trend lines?
- A: Yes, moving averages and support/resistance levels are commonly used alongside or as alternatives to trend lines.
- Q: How do I confirm a trading signal from a trend line?
- A: Look for additional price patterns or indicators that support the potential trade setup.
- Q: Is it recommended to use trend lines as the sole basis for trading decisions?
- A: It’s advisable to combine trend lines with other technical analysis tools and fundamental analysis for better decision-making.
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