No single indicator can provide the ideal entry level and the new Forex trader has to grapple with this stark reality. Many find this hard to accept and spend countless weeks and months and hard earned cash in search of what could be termed the 'holy grail.'
Learning to trade the Forex is hard work and needs to be treated like a business, the same as any other business. It requires a large investment of time, energy, mental discipline, and a cautious investment of cash until the necessary skills are acquired.
Trendlines are just one of the tools seasoned traders use along with other indicators to provide a reliable Forex entry signal.
Here we spell out two distinct ways in which trendlines can be used safely. Using a higher time frame candlestick chart such as a 60 minute, 4 hour, or even daily chart, a trendline is drawn along the most significant lows in an uptrend or across the most significant highs in a downtrend.
1. Momentum Combo
As price moves upward in an uptrend or downward in a downtrend, it will retrace and bounce off the trendline at certain times. However, using a trendline bounce by itself as a Forex entry signal is too risky. There have to be other factors.
Once you have drawn the trendline you now have a graphical representation of price movement and you will be able to see where price has to retrace to test the trendline once again.
Now use other indicators to see if that level where price would need to retrace to test the trendline combines with other factors.
Calculate your daily pivot points and draw horizontal lines on your chart to mark them.
Run your eyes left on the chart and note if there were any significant highs or lows that formed support or resistance within the last few days. Support and resistance on higher time frames usually provide more substantial reference points.
Use the Fibonacci tool on your charting software and mark retracement and/or extension levels on a variety of swing highs and lows and see if any intersect the trendline.
Also make sure you have the 200 EMA (Exponential Moving Average) line shown on your charts and note whether this also intersects near or at the trendline.
Now if you have a combination of two or three of the above indicators meeting at the same place you have now identified a Forex entry signal that can be regarded as high probability.
Put in your entry order to be take in long at this point where the trendline intersects with the other indicators and set a reasonable target limit for what probably will be a profitable trade.
For a downtrend, simply use the above indicators going the other way.
2. Break Combo
The second way to identify a reliable Forex entry signal using trendlines is to watch for a break of a trendline on a higher time frame such as the 60 minute, 4 hour, or daily chart.
Some traders sent an entry order to go long or short once price has broken the trendline by a few pips. That works for some.
There is however a safer way to trade a trendline break.
It will be observed that often (not always, nothing is absolutely certain when trading the Forex) once price has broken a trendline and moved 15-30 pips, it will come back, retrace, and test the backside of that trendline.
This is where again you use the combination of factors mentioned in the previous strategy.
Look to see if the point at which price may come back to test the backside of the trendline coincides or combines with factors such as:
- Pivot points
- Previous swing highs or lows marking support and resistance
- Fibonacci retracement or extension levels
- 200 EMA
Now when you place an entry order to be taken in at that level you are doing so on the basis of a clearly defined Forex entry signal.
For a graphical example of the above, see the resource box below.
Be aware that trading trendline signals on lower time frames such as 30 minute, 15 minute, or even 5 minute charts are very high risk trades. Price will break these short term time frames frequently during the course of a day and catch a new trader frequently by luring them into a trade they later regret.
Be patient and wait for things to setup as described in the two methods above for high probability trades triggered by a combination Forex entry signal.