The trading method presented in this article is derived from the V-Power Day Trading Method.
Trading with trend lines is perhaps one of the easiest ways to get started with price action trading. Trend lines, as the name suggests indicate which way the price of the security is moving; up or down.
Trend line trading also brings with it, some benefits such as the ability to use clean charts. It allows traders to focus on the most important element of a price chart, which is price itself.
While some might find it difficult to trade with trend lines alone, with enough practice you can gain the confidence and be able to plot trend lines in real time. There are many trading strategies that are developed and widely available, based on trend line.
Such trading strategies focus on the core concept of price breaking the trend. While one might have come across the saying that the trend is your friend, trading based on counter trend price movements has its own benefits.
With such counter trend price action, a break on the trend line can reward the chartist with profits that would have been missed if one was a regular trend following trader. But that is not to say that there are no risks.
Trend following strategies work best with swing trading. This way, the trader is able to capture and remain with the trend over prolonged periods of time. This also exposes the trader to the short term swings in price.
In this trading strategy called the double trend line trading method, we present a unique way to trade the markets in the short term. This trading strategy is ideally suited for short term traders.
It allows you to capitalize on the price action and enables traders to position themselves before such a move happens. As a result, this trading strategy is fast paced, but at the same time focuses on a good risk to reward ratio as well.
The double trend line trading method
The double trend line trading method, as you might have guessed by now makes use of two trend lines. One might question the benefit of using an additional trend line.
The point here is that we make use of a longer term trend line and the shorter term trend line. Traders who have some familiarity with watching the charts will know that trend lines that span over days or weeks are much harder to break compared to the intraday trend lines.
Likewise, it is also common knowledge that the steeper a trend line is, the higher the chances that price will break the trend line. On average, trend lines tend to slope at an angle of 45 degrees.
When the trend line is too steep, or too flat, it is only a matter of time for such trend lines to be breached.
With the double trend line strategy, we use the steeper and short term trend line as a trigger for our trades. The space between the steeper trend line and the longer term trend line is basically the profit area.
The chart below illustrates the double trend line trading concept.
Figure 1: Double trend line trading
As shown in the first picture, the major trend line (the thicker line) is your average trend line. You can see that this has a slope of about 45 degrees.
The second trend line (dashed line) is the steeper trend line. The slope of the angle of this trend line is evidently higher.
When price breaks this steeper trend line, it almost always extends toward the major trend line. The more distance there is between the two trend lines, the higher the profit potential.
By using this counter trend trading techniques, traders can employ a strategy as simple as using two trend lines to trade with this method. Let’s take a closer look into how to trade the double trend line trading strategy.
How to trade the double trend line trading strategy?
The first step, if to identify a trend on the price chart. You can do this by quickly scanning the securities of your interest. Typically, we use a one-hour chart time frame. This is more suited if you are a short term trader.
The first step is to observe the chart where the trend is clearly bullish or bearish. You can do this by observing the highs and the lows in price. Once a trend is identified, the next step is to connect the two consecutive lows to form a rising or a bullish trend line, or to connect the two consecutive highs to form a bearish trend line.
Typically, this is the major trend line and we anticipate that when price changes course, it will move to this major trend line. Pay attention to the slope of the trend line as well. It should be at an approximate angle of 45 degrees.
After plotting this major trend line, continue to observe the charts. If the momentum is strong, then you will notice that price will continue in the direction of the trend. During this period, you can see price rising or falling very fast, forming a new high or a new low.
Now, connect the highs or the lows to plot a second trend line. In this instance, the trend line should be steeper compared to the major trend line that you plotted. However, make note that the trend line shouldn’t be too steep as this can give a distorted view of the markets.
Once the two trend lines are plotted on the chart, you can take a short position (in case of a rising trend line) or a long position (in case of a falling trend line), targeting the major trend line.
The next chart illustrates a short position.
Figure 2: Double trend line strategy. Short position example
In the above example, you can see that the major trend line looks like a normal looking trend line. While the slope is not exactly 45 degrees in angle, it is still an acceptable slope.
Within this major trend line, you can see that the bullish momentum in price is rising. This leads to another trend line which is much steeper than the first. After a brief consolidation, price breaks lower and eventually gravitates towards the major trend line.
The stops can be placed near the highest close or the highest high while targeting the trade once price touches the major trend line.
The next chart, in figure 3 shows a long position that can be taken based off the double trend line strategy from falling trend lines.
Figure 3: Double trend line strategy. Long position example
In the above example, we illustrate how a long position is taken. Here, if you observe the chart, the first trend line, which is the major trend line is plotted by looking at the significant lower highs that are formed in price.
Following this, another trend line is plotted as the bearish momentum pushes prices lower. When this steeper trend line is breached, a long position is taken at the breakout from the steeper trend line.
This leads to price maintaining its bullish momentum and evidently reaches the major trend line, where profits ca be booked.
The double trend line strategy – Pros and cons
As with any trading strategy, there are both pros and cons. The double trend line trading strategy is no different.
Firstly, this trading strategy is more suited for traders who are comfortable with price action based trading methods. You also need to be fairly confident and accustomed to be able to plot the trend lines correctly.
Not many traders are able to do this in real time, and therefore requires a lot of practice. Also trading this method without the use of any indicators can be a bit intimidating at times for some traders.
The advantages with this trading strategy, is the fact that it can be applied to any markets. While this article talks about using the short term charts such as 1-hour or even 30-minute chart, you can in fact look at charts with higher time frames such as H4 or daily.
This is a counter trend trading strategy and therefore if you prefer trend trading and the typical buy and hold method of trading or investing, then this is not the ideal choice of a trading strategy.
However, the profits you can make from this trading strategy are consistent as there are many trading opportunities that come by.
You can also look at a partly automated method of using the two trend lines by means of the V-power expert advisor.
Figure 4: V-Power EA
The MT4 chart in figure 4 shows how the v-power EA looks when applied to the chart.
As you can see, there are multiple setting that you can use such as showing the entry zones both to the long side and the short side. You can also trade in real time by clicking on the Entry Now button.
This EA shows you key areas of support and resistance. Using these levels, you can then plot the trend lines. The V-Power EA allows you to quickly identify potential set ups.
Enhancing the double trend line strategy
Besides the main ways of trading, traders can also look at implementing some tweaks to fine tune this trading strategy and to maximize the profits.
For starters, only pick chart set ups that have a high profit potential. This will ensure that your risk reward set up is at least 1:2 or higher. By using this simple technique (which means you need to be patient to wait for the right set ups to occur), you can build a robust trading strategy.
Secondly, you can implement this strategy to align itself with the major trend.
For example, if the daily or weekly chart trend is bullish, then on the 1-hour or 30-minute chart time frame, you should only look for a corrective trend breakout. In other words, look for a correction in price, which means that you will be looking at taking bullish positions on a breakout from a falling trend line.
This way, you do not just limit yourself to the profit potential from the two trend lines, but you can also enhance this system to trade in the direction of the major trend. This can be a safe way and in fact allows you to pick the rallies in a downtrend or dips in an uptrend.
Double trend line strategy – Conclusion
In summary, the double trend line trading strategy is a very simple trading set up. The success of this set up is based on the fundamental concept of the pump and dump scheme that is common in the financial markets.
As price moves in a trend, it starts to gain momentum as more and more traders join the trend. The smart money, which is primarily responsible for the start of the trend thus pumps the prices higher which soon gains momentum due to the majority of traders joining this trend.
Once there are enough participants, the smart money then gives one last push. This is where the steeper trend line becomes so important. Typically, right after fresh highs or lows are formed, price instantly starts to drop like a rock, or soar like a rocket.
By trading this strategy, one thing is for sure; you will not be caught out on the wrong side of the market. In fact, with the double trend line method, you will be trading in the direction of the smart money.
This is why the results are often quick. Most traders would agree that it is always best to make quick profits in the market and get out. This is where the double trend line method can be so valuable.
This strategy can be further enhanced by using the V-power EA system. This is a handy MT4 expert advisor built specifically for the purpose of trading this strategy. Unlike most other EA’s, the V-power EA enhances your trading.
So, despite using the EA, you are still in control as this EA allows you to better manage your trades and allows you to spot potential set ups as they are formed in real time.