Trading a trendline bounce can be a very profitable, yet simple, strategy for joining an existing trend as it provides a relatively low-risk entry point for traders. Here are the steps of this strategy:
- First determine how long you wish to ride the trend for because that will influence the time frame of the trend you will ride on.
- Make sure that the current market sentiment agrees with the technicals. If not,
- Note the gradient of the trendline in both time frames and the number of times it has been tested.
- Confirm trend direction and trend strength with oscillators.
- Enter a limit entry or market entry order based on the hourly or daily trendline, depending on your preferred time horizon.
- Place stop-loss orders at least 20 pips on the other side of the trendline.
- Determine your holding period , Since many people like to day trade the forex market, I will highlight two suitable time frames for this trading horizon: the daily and hourly time frames. Even if you trade intraday, it is necessary for you to use at least the hourly chart to plan your trade even though you may be using the 5-minute or 15-minute chart to monitor your trade. In my opinion, it is essential for day traders to know the trend direction on the daily chart as this enables them to trade knowing the overall technical picture.
- Make sure that the current market sentiment agrees with the technicals , The forex market is mainly driven by the players’ perceptions of fundamental news, and technicals usually follow the market sentiment. Hence, you should look for the market sentiment to be supportive of the trade, in the direction of the prevailing trend. If the market sentiment appears to be shifting, and the prevailing trend seems to be threatened, you should give the trendline bounce a miss. However, if the sentiment agrees, you can proceed with the rest of the strategy as outlined.
- Note the gradient of the trendline on both time frames and the number of times it has been tested. As mentioned earlier, for the Trend Riding Strategy I prefer to stay out of joining a trend that is on a very steep trendline, but that really is up to you, depending on your own risk appetite and trading style.
- Confirm trend direction and trend strength with oscillators , Ideally, either Stochastics or MACD histogram should be sloping upward when trading an upside bounce (off an up trendline), or sloping downward when trading a downside bounce (off a down trendline). However, this condition is not a prerequisite as these oscillators may lag if the momentum is not accelerating, but if you can get additional confirmation from the oscillators then the probability of success will be higher
- Enter a limit entry or market entry order on the hourly or daily trendline, depending on your preferred time horizon.The problem with placing a limit entry order is that sometimes the price may not reach your limit to open your position, and you could end up with an “either my price or none” situation, missing out on the opportunity to trade a trendline bounce. One way of securing your place on the trend bounce is to initiate your trade a few pips before the price-trendline touch (see the following chart).
- Place stop-loss orders at least 20 pips on the other side of the trendline. Having tight stops is the worst enemy of this strategy. It is very common for currency prices to exceed and pierce the trendline, even a daily one, by 10-15 pips or more in a very fast-paced move, and then just as quickly retreat back into the main price territory on the action side of the trendline. This move is often orchestrated by institutional players to hit the accumulation of stops beyond the trendline so as to sweep money off weak hands into their own pockets. Of course sometimes the prices may pierce 20 plus pips through the trendline, and then make a U-turn back into the old territory, resuming the underlying trend.
Source: Technical Execution Of The Strategy
