Drawing trend lines can help you "see" potential trend reversals...I got into the habit of drawing them many years ago, well before I developed my current trading style. Trend lines form the basis for everything described throughout this blog...They are at the heart of my trading methodology. They give me that little bit of 'edge' needed to have confidence in all the rest of the things I use - the Price Action, the patterns, the signals etc.
06/18/2016...TLBs suggest imminent trend changes
Trend lines are reflections of Price Action and can suggest what is happening with prices...
These next two charts show a couple of ways to use trend lines for taking long positions.
After some indicators had printed signals
Price Action via a TLB was used as the TRIGGER to BUY.
This 2nd opportunity followed closely behind the one above...It also used P/A via an MOF pattern
which confirmed that the TLB had indeed reversed the former down trend.
This example used Indicator Signals as the TRIGGER to BUY.
Often if you miss the 1st opportunity you get a second chance to enter the new up trend.
I call the above trade "Late to the party" because it's the 2nd entry in the reversal that's already underway.
(Note that the MOF and Slingshot signals could not be identified until after price broke the trend line)
An added advantage of using trailing BUY-STOP orders above a trend line (and above the currently developing bar) is that they can keep you out of a losing trade if signals do not develop or when price just continues to trend down without a reversal.
...but sometimes the bear eats you anyway...
Trend Line Breaks
Price breaking a trend line is a good signal that a down trend may
be reversing. I use three basic methods to enter the market using TL's...
- 1) anticipate a break-out by reading indicator signals and try to get a position while price is still below the TL
- 2) follow a TL down with a trailing buy-stop placed above the current price bar and just above the TL
- 3) wait for price to break a TL then place an order at that level, looking for price to re-test (TLB re-test)
illustrate the price action that describes the general shape of Trend Line Breaks.
YMU3 mini futures 45 tick chart early into the new session...This is a simple HLC bar chart.
30 WMA and TRIX histogram in with price...Session volume to the right and MACD with histogram
combined with Stochastic in the study pane.
Understanding Support/Resistance and "Free air" can be helpful for deciding
when enough IS enough
Trend Line Break with a retest...
7/11/2013 "Perfect" Signals
6/06/2013 using TRIX to spot Divergence
TRIX histograms in the price pane make it very obvious... once again - divergence suggests a potential for imminent trend change.
The trend line getting penetrated tells you: 1) when to take a position and 2) at what price level
Above - the divergence between price and the TRIX histogram was very clearly seen, with price making a lower low while TRIXh was making a higher low. There was also divergence in the study pane, with both the MACD and the MACD histogram making higher lows (these were just a bit harder to see at a glance). In this case the stochastic was in the over-sold buy area but was not showing divergence.
The arrow marks the point where price broke up through the trend line @14937...your limit order should be placed at that level.
12/31/2012 Regular and Reverse Divergence
01/07/2014 Reverse divergence
10/14/2012 TREND LINE BREAK and RE-TEST
An example of entering a trade in the YM mini futures...
A Buy Limit+TTO order was placed at the trend line, under the bar that broke through the trend line. Price then re-tested that level on the next bar, filling the order.
1/14/2013 Another Futures Divergence play below...
Waiting for divergence plays can be tedious and boring but patience rewards you...you need to ask yourself the question - Do you trade for excitement or to take money from the markets?
3xD on three different time frames
Your choice of oscillators makes little difference for spotting divergences. On the chart below I was using the RSI oscillator along with the MACD histogram trend indicator.
As an aside, many years ago a trader (I think his handle was BlackIV) on the ClearStation website suggested to me that you can see and use other patterns in indicators, like a Head & Shoulders in William's %R...just keep your mind open to ideas - see if they can work for you...
Light green charts are from 2012
Scalping using MACD Divergence
Spotting divergence in the immediate proximity of a trend line break can offer an additional rational for entering a buy order. Here the exit was in the area near the longer term trend line for a scalp.
Sometimes you can use either the MACD or HISTOGRAM divergence to enter early, below the trend line. Sometimes both the MACD AND HISTO are divergent which is a stronger signal.
Also be aware of Reverse divergence:
On the chart below, Regular divergence on the MACD histogram and on its EMA lines printed @1230 - which was followed by Reverse Divergence @1250.
Notice that the MACD EMA lines did not show reverse divergence @1250 while the histogram did - but by then the lines were clearly indicating that the trend was moving to UP.
Although the MACD indicator is often regarded as a single "trend-indication" tool, I'm suggesting that you should learn to read both components.
Basically its buying a breakout of a down trend line