trendline Archives - Algorithmic and Mechanical Forex Strategies

As with virtually any trading scenario, we must first determine the direction that we need to trade the pair for the greatest likelihood of success.

By looking at the historical 4 hour chart of the GBPUSD below, there are several reasons we know that we want to go long (buy) the pair. Price action is above the 200 Simple Moving Average and is pulling away from it. The pair has been making higher highs (green lines) and higher lows which indicates an uptrend. Also, at the time of this chart, the GBP was the strongest currency and the USD was one of the weaker currencies.

All these point to a buying opportunity.

But, the question remains, when do we enter the trade?

Here’s where we bring in the trendline…

Let’s take a look at the historical 4 hour chart of the GBPUSD pair below…

We can see that price action has come in contact with trendline support at several points – note the blue boxes.

Since price has tested and respected the trendline for at least three “touches”, we know that our trendline is valid.

Our entry strategy to buy this pair using trendline support will be to wait for price to trade down to the trendline and into the “Buy Zone”. If price trades into the Buy Zone and stalls and a candle does not close below trendline support, just as in our blue box examples, we can take a long position on the pair with our stop just below the trendline or just below the lowest wick that penetrates the trendline.

The trader could exit the trade if price reaches resistance, the previous high, or by employing a simple 1:2 Risk Reward Ratio.

Now let’s take a look at a historical 4 hour chart of the USDCHF for an example of selling against Trendline Resistance in a downtrend…

This trading scenario will be virtually the opposite of what we did in the previous buy example.

We want to sell the pair a it has been making lower lows (red lines) and lower highs. Price action is below the 200 SMA and pulling away from it. Also, at the time of this chart, the USD was weak and the CHF was strong.

Again, price action has tested our resistance line at several points (the blue boxes) so we know the trendline to be valid. In this example we would wait for price to trade up to trendline resistance in the “Sell Zone”. As long as a candle does not close above the trendline, we would sell the pair with a stop just above the trendline or just above the highest wick to penetrate the trendline.

The trade could be closed should price reach the previous low or we could use a 1:2 Risk Reward Ratio to exit the trade.

RKrivoFX@gmail.com

@RKrivoFX

After a strong counter trend move, as long as the longer term trend remains intact, looking for opportunities to “buy the dip” and “sell the rally” can be a solid trading strategy.

When identifying a pair that is in an uptrend, the concept of buying the dip can be put to good use. The idea is that as the pair continues to move higher, invariably there will be pullbacks/retracements/dips that occur. When those take place, the trader is presented with an opportunity to enter the trade – buy on a dip – in the direction of the trend at a more favorable price.

Take a look at the historical 4 hour chart of the AUDUSD below for a visual on this concept…

Buying the Dip in an Uptrend

To time our entry into the trade, an oscillator can be used so we can enter when bearish (downside) momentum shifts to bullish (upside) momentum. In this case we chose Slow Stochastics. (Note the timing of the entry with the Slow Stochastics crossover to the upside in the circles.) When the buying on dips a stop can be placed below the lowest candle or wick that occurred during the retracement or dip. In this case, we also have a valid ascending trendline (black line) that can be used for stop placement below the trendline.

In a downtrend, the process would be reversed. Take a look at the historical 1 hour chart of the USDCAD below…

Selling the Rally in a Downtrend

To time our entry into this trade, we can enter when bullish (upside) momentum shifts to bearish (downside) momentum. Again we chose Slow Stochastics. (Note the timing of the entry with the Slow Stochastics crossover to the downside in the circles.) When selling on rallies a stop can be placed above the highest candle or wick that occurred during the retracement or rally. In this case we again have a valid descending trendline that can be used for stop placement above the trendline.

All the best and good trading,

Richard Krivo

RKrivoFX@gmail.com

@RKrivoFX

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