Trend Line Break and Forex Trend Reversal
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 price will then move down
Upward Market Direction Reversal
This reversal 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 price will then move up
Downwards Channel break
This reversal 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 this line 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 price should immediately move in that direction without much of a resistance.
If on the other hand the price 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 line is still holding.
Another tip is to wait for the trend line to be broken and for the price to close above or below it so as to confirm this reversal signal.
What happens is that most traders open trades waiting for a reversal even before the trend line is broken, only for the price to touch this line and for the trend line 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 price 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 reversal signal is confirmed once the price 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 reversal signal is confirmed once the price closes above the downward line, this should be the correct time to open a buy long trade, so as to avoid a whipsaw.
Double Tops or Double Bottoms Chart Patterns Combined With Trend Lines Reversal Signals
A good trade setup to combine this trend line reversal setup 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 trendline break reversal 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 trend line break reversal appeared.
First Example of Upward Direction Reversal - the Double tops reversal chart pattern had already formed before the trend line break reversal signal appeared on the currency chart.
Second Example of Downward Direction Reversal - the Double bottoms reversal chart pattern had already formed before the trend line break reversal signal appeared on the currency chart.
Double Tops or Double Bottoms Combined With other Reversal Signals