Horizontal
Trendlines
We have all had the experience of identifying
a trend and then after some thought we finally jump
into a trade with the trend, but it seems, just
as we do the market reverses and we get spanked.
My primary mode of trading is as a trend trader.
My thinking is that as long as I trade with the
trend my chances of a successful outcome are greatly
increased. The problem is that markets don’t always
continue in one direction, as there is an ebb and
flow to the markets.
Now, you can use fancy
indicators like the ones I use to help identify
trend changes or you can simply use a couple of
horizontal trendlines. I thought that in
today’s lesson we would take a look at this relatively
simple little strategy in identifying trend changes
and a trade setup that I like to call the
Horizontal
Trendline Trade.
This is a technique to be used with a trending market,
not one that is engrossed in chop.
So,
it goes without saying that one of the first things
to consider, is the market trending. That is, is
it making higher highs and higher lows for an uptrend
or is it making lower lows and lower highs in a
downtrend.
Next, we’ll need to mark the apex of the price bar
or candlestick with one trendline and then mark
the opposite side of the price bar or candlestick
with another trendline. So, basically we are redrawing
a horizontal trendline at the peak of each move,
if the peak is broken with the next candle then
we simply redraw both trendlines to fit the new
candlestick.
However, once the market
stops trending, then the opposite trendline will
be broken, which then signals a possible change
of trend. Upon this trendline penetration,
we have to consider that the trend is over and a
new trend in the opposite direction is underway.
We can then look to reverse our position or simply
enter into a new position.
Take a look at the chart below, it is a 10-min chart
of the S&P E-Minis. After breaking out of some
chop, the market finally starts to trend lower.
As it continues to move lower every 10-mins a new
candle will form. So, about every 10-mins I take
a look at the price chart and if necessary I redraw
the two horizontal trendlines at the extreme peak
or apex of the down move and then I mark the opposite
end of the same candle. I will continue to trade
the market short as long as prices remain below
the higher trendline. For example, in the chart
below, we can see the extreme peak in the downtrend
down around the $868.75 mark and so I draw in my
trendline at the apex of the candle. At the other
end of the same candle, I then draw in my second
trendline at a price of $871.25. As long as the
price of $871.25 is not hit by one of the next few
candlesticks to form, I will continue to trade the
market short. I actually look for the market to
penetrate the higher trendline by two ticks or in
this case, $871.75 before I consider a break in
the downtrend. A one tick penetration or $871.50
would simply be considered a retest of resistance
at the trendline.
Next, let’s take a look at the Horizontal Trendline
Trade Setup.
This
is a strategy that I use every day and works out
to be very profitable for me. I prefer to use a
10-minute chart for drawing my trendlines on as
it seems to give me the best signals and I do not
have to constantly redraw trendlines.
On the chart below, I have drawn in my “Horizontal
Trendline Trade.”
Horizontal Trendline
Trade Setup:
