This method of trading is fairly simplistic as long as we are able to construct an effective Trend Line. By using this strategy, we are looking to identify a series of lower highs or higher lows depending on the direction of trade. By drawing a trend line across these points we should be able to identify the future point at which the price will react again in a similar fashion. This should enable us to buy or sell at the highs and lows therefore maximising our potential returns.
For the Trend Line to be effective we need a minimum of two lower highs for a downtrend to be confirmed or two higher lows for a valid uptrend. Please see the chart below as an example.
When the price reaches the trend line at future points these are our opportunities to buy or sell. The beauty of the Trend Line strategy is that is can be used across any timeframe and with any currency pair. It is important to note that some pairs are more effective than others due to volatility and liquidity.
Although this sounds very simple to use and can be very effective, it is by no means flawless. It has its weaknesses like most trading strategies.
Often the trend line can be broken and what we see as a result is a breakout. This can be very hazardous to your trading results if effective risk management is not used. You should be using stop losses not too far past the line, but far enough to allow for fluctuation. Often there is nothing more frustrating for a trader when they choose the right direction of the trade but are taken out early before the overall move happens due to the fact that they have placed their stop losses too tight to the entry price. We should also understand that the trend line is not an exact number and the price may move slightly past it before resuming the trend.
How to minimise the risk whilst maximising the returns –
Often traders will move their stop loss to a breakeven point once the price has moved in their favour by the amount risked.
Some traders may look to secure profit by closing half the trade and amending the stop loss up to that profit level leaving the other half to run on the hope that it reaches a higher target.
The main pros and cons for the Trend Line strategy-
It is simplistic to use and can be applied to all currency pairs
You can maximise your returns by catching the price action right at the top or bottom of the trend whilst minimising risk with the use of stop losses just past the line.
It is not an exact science and the price may come close to the Trend Line but not actually trigger at your entry point before moving in the direction you wanted.
The Trend Line may be broken and we see a breakout resulting in a stop out and losing trade.