Trendline Break

After price has moved in a particular 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 trendline has been broken.

Since the line is point of support or resistance then we expect the market to move towards the opposite direction. When this happens traders will close the orders that they had bought or sold. This is referred to as taking profit.

Up trend Reversal

When trading price breaks-out up-ward line (support) the market will then move down

This signal is considered to be confirmed with creation of lower high or a lower low. This also provides a trading opportunity to go short once it is broken.

Down trend Reversal

When price breaks downward line (resistance) the market will then move up

Downward Channel break

This signal is considered to be complete with creation of 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 may first of all consolidate before moving in the opposite direction. Either way it's always good to take profit when market direction reverses.

To trade this setup as a trader once you open a new trade in direction of the market trend reversal the price should immediately move in that direction, in a price break out manner. This means that the market should immediately move in that direction without much of a resistance.

If on the other hand the market doesn't 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 trendline to be broken and for the market to close above or below it so as to confirm this trade 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 to continue with the current market direction.

Therefore, when trading this setup it is best to wait until the breakout has been confirmed by trading price closing above or below the trendline, 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 downwards 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 set up to combine this setup with is the double tops and double bottoms patterns. Read Double Tops & Double Bottoms Chart patterns Guide.

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 trade signal popped up.

First Examples of Upwards Direction Reversal - the Double tops chart pattern had already formed before trend break signal appeared on the chart.

Second Examples of Downward Direction Reversal - the Double bottoms pattern had already formed before trend break signal appeared on the chart.

Double Tops or Double Bottom Combined with other Reversal Signals