Trend Line Break
After price has moved in a certain direction for an extended period of time within a channel it reaches a point where it stops moving within the channel. When this happens we say that the trend line has been broken.
Since the line is the point of support or resistance then we expect the market to move towards the opposite direction. When this happens traders will close the orders which they had bought or sold. This is called taking profit.
When price breaks upward line (support) the market will then move down
This signal is considered to be complete with the formation of a lower high or a lower low. This also provides a trading opportunity to go short once it is broken.
When price breaks downward line (resistance) the market will then move up
Downwards Channel break
This signal is considered to be complete with the formation of a higher low or higher high. This also provides a trading opportunity to go long once it is broken.
NB: Sometimes when price breaks its trend it might first of all consolidate before moving in the opposite direction. Either way it is always good to take profit when the market direction reverses.
To trade this setup as a trader once you open a new trade in the direction of the trend reversal the price should immediately move in that direction, in a price breakout manner. This means that the market should immediately move in that direction without much of a resistance.
If on the other hand the market does not immediately move in the direction of the price breakout then it is best to close out the trade because it means that the trend is still holding.
Another tip is to wait for the trend line to be broken and for the market to close above or below it so as to confirm this signal.
What happens is that most traders open trades waiting for a reversal even before the trend is broken, only for the price to touch this line and for the current market direction to hold and the currency pair to continue with the current market direction.
Therefore, when trading this setup it is best to wait until the breakout has been confirmed by price closing above or below the trend line, depending on the direction of the market.
- Upward Market Direction Reversal - this signal is confirmed once the market closes below this upward line, this should be the correct time to open a sell short trade, so as to avoid a whipsaw.
- Downward Market Direction Reversal - this signal is confirmed once the market closes above the downward line, this should be the correct time to open a buy long trade, so as to avoid a whipsaw.
Combining With Double Tops or Double Bottoms Chart Patterns
A good trade setup to combine this setup with is the double tops and double bottoms chart patterns. Read Double Tops and Double Bottoms Chart patterns Tutorial.
This setup should already have formed before the trend break signal. Because these double tops and double bottoms are also reversal signals, then combining these two setups will give the trader a good probability of avoiding a whipsaw.
In the above chart screenshots these setups can be confirmed to have formed even before the reversal signal appeared.
First Example of Upward Direction Reversal - the Double tops chart pattern had already formed before the trend break signal appeared on the currency chart.
Second Example of Downward Direction Reversal - the Double bottoms chart pattern had already formed before the trend break signal appeared on the currency chart.
Double Tops or Double Bottoms Combined With other Reversal Signals