Using Trend Lines
Trend lines have many uses, but the main ones are: trend line bounces, and trend line breaks. Check out the picture below.
This trend line has had three bounce so it's now active. Now that the price is approaching that line again, what will happen? Well the trend line will either continue to hold or will break the line. So what happened this time?
Wow it broke and it climbed 200 pips!
This trend line was based on three points. On the fourth approach, the trend line tried to act as resistance. If it had succeeded in acting as an area of resistance the price would have turned around and headed back down. However, the bullish movement was too strong. That means the bearish trend is over and a bullish trend is starting.
Now take a look at a trend line bounce.
Again, this trend line has had three bounces so it is now active. As you can see in the picture, the price is approaching the line a fourth time. The price is either going to break the trend line or bounce away from it. This time it bounced.
Look, it bounced and went up 150 pips!
If you read about candles in the previous section, you will have noticed, that in the picture above, there was an indecision (reversal) candle on the trend line. You might technically think that because the wick was below the line the trend line was broken. Well that's where it gets tough!
There are three schools of thought on what constitutes a trend line break. Strict, moderate and lax.
Strict - These trend line users believe, that as soon as a candle passes through a trend line the line is broken, and a trade can be entered.
Moderate - These trend line users believe, that as long as a candles body does not close beyond the trend line the line is not broken. So a wick can poke through the line, like you saw in the image above, but as long as the body doesn't then the trend line is still active.
Lax - These trend line users believe, that a candle must first break through the line and then the body must close beyond. When the next candle opens beyond the line they finally consider the line broken.
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