Trend Reversal Using Diagonal Trendline Breakouts Strategy






In any market, whether it is in forex, stocks, bonds, cryptocurrency, price could only have three types of behaviors – trending, ranging, and trend reversal. To be able to profit from the market more often, a trader must have a strategy for each type of market behavior. Here, we will be talking about trend reversals.

Knowing About The Trend Reversals

Trend reversals are very profitable since it allows traders to catch the price at the peak, or at the bottom of the trend. By doing so, a trader can catch a new trend as it starts, or at the very least, allows the trader to profit as price tries to define its range, if it turns out to be a ranging market.
But how could we make money out of trend reversals if we do not know how to identify a trend? Simple. You can’t. A trader can’t trade what he can’t see. You might as well gamble your money away if you’d try to do this.
Now there are many ways to identify a trend – price action, moving averages, and all other indicators could help you do that. But now, we will be talking about trendlines and how we can use it to trade trend reversals.
So, how do we identify trendlines? Trendlines could be drawn on a chart by connecting the highs or lows of price.


This downtrend has successive lower-highs which could be connected by a trendline. It doesn’t need to be exact, as what we are looking for is an area near the trendline. A downward trend could easily be identified using a trendline, since downward trends have trendlines that are sloping downwards both at the top and bottom.





Upward trends on the other hand have trendlines sloping upward.
These diagonal trendlines also act as support and resistance. Trendlines that are above the price are resistances while trendlines below price are supports. Notice how price often bounces off the trendlines on both charts.
Extended trends however tend to reverse at its peak. This is where trend reversal strategies could make some money for traders.

The Entry

Trend reversal entries are pretty much straight forward. What we will be looking for are candles closing beyond the trendline. If it is an upward trend, we will be looking for candles closing below the support. If it is a downward trend, we will be looking for candles closing above the resistance. These are indications of possible breakouts from a previous trend.
One important thing to take note of is the word “close”. Often, price does peak beyond the trendline, but it does go back within the trendline after a very short while. These are called false breakouts. Entering on a false breakout is very disastrous, since it usually signifies that price is going the opposite direction. To mitigate these situations, we will have to wait for a strong close beyond the trendline. We can’t trade if the candle still hasn’t closed.


The Stop Loss

Just like the entry, the stop-loss is also pretty much straight forward. Since we are trading a trend reversal of a previous trend, the last price action would either be the lowest-low or the highest-high. The stop-loss would be placed a few pips below the fractal formed by the lowest-low (downtrend) or highest-high (uptrend).



The Take Profit

Now, here lies the tricky part – Take Profits. Since we are trading trend reversals, and we are assuming that price would form an opposite trend on the chart, it would be hard to identify where price would stop. This is a problem, but a good one. Why? Because on the flipside, we are not limiting our income potential by using Take Profits. Again, we are not going to use take profits. Instead, we are gonna let the market tell us how much it wants to give us. How would we be doing this? Trailing Stop-Loss. Using a trailing stop-loss allows us to ride the market until we get stopped out and hopefully, we get stopped out on a big profit.
The next question is how are we gonna trail our stop-losses? Since we are expecting a trend reversal, the new trend should be forming successive higher-lows (uptrend) and lower-highs (downtrend). These higher-lows and lower-highs also form fractals, which we could place our stop-losses on.

If we had followed the rules and held the trade, we would have gained 109 pips, just before the trend reversed back down.


Conclusion

Trend reversal strategies using trendline breakouts are one of those strategies that allows a trader to squeeze out a huge amount of pips from the market. This is because using this strategy allows the trader to enter the trade as it forms and hold on to it until it ends. The tricky part is on the psychology of trading this type of strategy. With this strategy, you will not be setting a fixed take-profit, which makes you vulnerable to making decisions based on your emotions as price fluctuates up and down. Here, your greed and fear will be tested. Will you be sticking to the trading rules or will you be letting fear take you out of the market and manually close the trade? Trade wisely and make profit.


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