Making Money on Forex Trends

You know how to spot support and resistance, how to draw trend lines, and how to construct trading channels. Now it’s time to see how you can make trades based on trendlines.

Two things can happen when a forex pair reaches support or resistance. First, the forex pair’s price can bounce off the line, or it can break through it.

Playing the bounce

To play the bounce on a forex pair, you essentially place a buy order at or near the current trend line. For support, you would place a buy order, hoping to make money when the price rises off a bounce from a support line. Alternatively, trading a resistance line would require a short position, which would generate profits if the price bounces down off resistance.

Playing the bounce is a great way to trade with confidence, as you are planning to make money on a trend that is already well established.

Traders who play the bounce usually:

1. Identify the lines in play on this current trade.
2. Wait for a touch to a support or resistance area
3. Place an order only after support or resistance is confirmed with a quick (but small) bounce off the trend line.
4. Enter a stop loss on the other side of the trend line to protect the trader against large losses if the trend line breaks.

This diagram explains the above trading process for trends:

*diagram*

Playing the break

In playing a break of a trendline, you plan to make money on the understanding that a trend line will soon fail, and that previously established support and resistance lines will not hold. While trends do go on for many days, weeks, months, and years, they do all eventually break. That’s just how the market works.

Traders who play the break usually:

1. Identify the lines in play on the break
2. Wait for a movement through the support or resistance line
3. Watch for a movement through the line by an amount that is outside of the “norm.” This can be confirmed with previous touches of the trend line.
4. Place an order on the other side of the trend line to buy or sell to catch the momentum of the break.
5. Enter a stop loss on the other side of the trend line just in case the market go against the trader.

The diagram below demonstrates this trade:

Do note that this is a low-probability trade. Traders who make trades based on breaking trends often have a large number of running losses; however, one profitable trade can easily produce a winning strategy. That is, if you lose 20 pips on 4 different trades, but make 150 pips on the fifth breakout, you have a net profit of 70 pips. This kind of trading isn’t for the faint of heart.

Playing with your patience

There is another way to play a break that will require some patience in executing your trade, but will provide for a better win-to-loss ratio. In this type of trade, you bet that a trend will break, but you wait for a second entry point where you can buy in at a better price.

In all financial markets, there exists a phenomenon known as “trader’s remorse.” Trader’s remorse happens when a trend breaks, but the price touches the line a second time before continuing the break.

Take advantage of traders remorse requires:

1. Identify the trend in play, one that you believe will break.
2. Wait for a movement through the trend line.
3. Watch for the confirmation from a dip or rise well above the established trend
4. Confirm the entry by seeing “trader’s remorse.”
5. Place the order at a better price near the trend line.
6. Enter a stop loss on the other side of the trend, so as to protect yourself from a market reversal.

This trade is demonstrated with the diagram below:

As you can see, such a strategy requires that you have the patience to wait for trader’s remorse. After trader’s remorse, you enter the market with a position to play the previous support or resistance line as its opposite. Support becomes resistance, and resistance becomes support.

Do note that the ability to trade this market happening is infrequent. As you can imagine, most breaks happen quickly and without warning, and often result in a large price movement following the break. As a result, there are fewer opportunities to make this type of trade; however, your win-to-loss ratio will be significantly higher than someone who makes pure bets on a breaking trend.