Using Diagonal Trend Lines in an Actual Trade

I realize that last post showing the picture of Tyler Durden may have frightened some of you, others got inspired.  You frightened ones, grab your Teddy bears and some tea.  We can bring you around to be mean enough to tackle the Forex market.

Today's post will fire you boys UP!!!

The last post showed the diagonal trend line was penetrated.  I said it should do a pullback to the diagonal trend line and then it will tank again.  Here is today's picture.  I scaled down in the time frame to a 4 hour chart.

The main diagonal trend line is the GOLD line.  The black line is for your training - training you to see what the price (and chart) is telling you.

The pair:  GPBUSD......

This is gold boys...study it

So, I ask you this...where will price go after the pullback? Many traders will get caught up in the pullback trap.  What is the pullback trap?

Look at the picture above.  I have drawn a gold line and a black line, both are diagonal lines.  The gold line is a trend line that I drew using 2 anchor points on a Daily chart.  That makes it pretty solid to say the least.  It usually (USUALLY) means that the price will go down substantially once that gold line was broken through and the candle closed below it.

The black line I drew on the 4 hour chart. It means that the price will pullback to it and then reverse.  But, because the gold line is so close, it may temporarily penetrate the black line to touch the gold line.  What's the point?

Some traders will see this pullback as an actual reversal and think that price is now going up and a new bull trade is in play.  When actually price should be trying to recover lost ground temporarily and then the BEARS will resume their course.  

Price should go down to the 1.49500 area this week.  Then?  Then we may see the BULLS take over as buying at that level of support would be pretty good.

So if I am correct, how do you trade this?  Here's a clue...draw some stinking diagonal trend lines and when price breaks through, go short to 1.49500

Here's a picture for you and where do you think you should draw a diagonal trend line????

So you looked at the picture did you?  I gave you the area where price will go to...1.49500, so you have your exit.  Where will you get in?  Where did you draw your trend line?  Answer the question Teddy bear boy!!!!!!!!!!!!!!!  Go get some milk and cookies and come back after your "friends" on Fakebook have consoled you...

So where do you get in for your entry? Where did or will you draw your new trend line?

How about a new picture?  No more teddy bears for you though, it's time you eats your spinach and man up.

Once it penetrates that AQUA colored line, you may want to consider going short...or not.  It really is your decision. But this is a guide to how the big boys trade.

Before you use real money I HIGHLY advise you to practice with a DEMO account. and learn about stop losses.

Diagonal Trend Lines, the Proof

Do Diagonal Trend Lines Work?

So you are skeptical whether a diagonal trend line works are you? You better be. The thing to remember is that a line, whether it be a horizontal line or a diagonal line, is either a support or resistance area.

A line is gonna be tested. It will either hit it and reverse or hit it and go through it. Rocket science? No but we dang sure find a way to make it hard don't we? Here is some good advice...

Stop over complicating it.

Tyler Durden approved

Now let's look at a chart. The other day I posted a chart where the price was hitting the diagonal support line. It was either gonna bounce off of it or penetrate it. So let's see what it did.

Again, Daily chart.  GBPUSD pair

You're gonna need to click on the picture to make it bigger so you can see it but here's the deal...it broke through support so now it will drop much more. Expect a pullback which should go back up to the diagonal trend line but not penetrate it then really drop nicely.

So, how do you trade this? 

Diagonal Trend Lines as Support and Resistance

Diagonal Trend Lines give Direction

Diagonal trend lines are extremely important because they can tell you when to get in or out of a trade. Always remember to check your diagonal trend lines before you get in or out of a trade.  

In my last post about Support and Resistance, I discussed how a horizontal line can show you where the price (the candles) will go.  

As you probably remember, using the analogy of a house, resistance is like your ceiling and support is like the floor of your house. Jump too high and you will hit your head on the ceiling (resistance) and you will fall down and lay on the floor (support) glad that you did NOT continue to fall even further.

Our first picture will show where price (I use candles) came down today, stopped, and then reversed and went back up...What caused it to stop and not continue falling?

Buy Low, Sell High with Diagonal Trend Lines

This is a Daily chart using the GBPUSD currency pair.

You can see that price halted and reversed but why? If you draw a horizontal line it makes no sense. You see the horizontal price line (in black) is above the most recent "swing low" so why didn't it just drop to that point?  Seasoned traders will immediately say that it is a pullback before it drops more.  Well, I say maybe...maybe not.

Now let's draw a diagonal trend line and see if it gives us another trading clue on the same chart.

Same criteria and pair...Daily time frame on the GBPUSD

And there we get an idea (crowd mentality or psychology, whatever you want to call it) of a reluctance for traders going short to hold their positions. Because it is a diagonal support line it very well may just bounce off of that line and become a LONG play. If you had gone short you may just take your profits and wait to see if it will continue/resume its downward course or reverses its course and begins to go up. 

I prefer the profits over regrets.

Support and Resistance

Here we go fellas!

Support and Resistance is best understood this way to me.  In my house I have floors and ceilings.  If I jump too high I will hit the ceiling (a resistance) and then I will fall down on the floor (a support).

Trading currencies, stocks, futures, whatever, is exactly the same.  When your Forex currency pair you are trading goes up, and then stops, it hit an invisible resistance.  Same thing when it is dropping, and stalls, it has hit a support level.

We will draw different colored horizontal lines at these support and resistance levels beforehand in anticipation that they will react to those levels.  This makes it easier.

How about a chart...Daily timeframe.

This known as a "naked" chart, no indicators

Now let's look at a Daily chart with some horizontal lines drawn on it.

Red lines are resistance and green lines are support.

Support (blue) and Resistance (red)

The price went to the highlighted areas because of the herd mentality.  People will trade as individuals but as a group they get nervous when points of resistance from the past are about to be reached...they start freaking out.

So I drew those horizontal lines for you to see that if you place one on your charts you can see if it has touched it several times or just a couple.  When it has touched it several times you can bet that other traders looking at their charts will see it as major resistance.  You need to know that.

Same thing applies for support levels (in blue).  Price starts falling and where will it go?  Past support levels are a very good indicator.

What You are Gonna Learn

You are here! You are either an experienced and frustrated forex trader or brand new and looking for help.  Both of you have probably experienced. in a very brief amount of time, an abundance of overly complicated trading systems that work ...sometimes.  I will try to change that and help you out.  If nothing else I will give you a new, simple way to look at your charts.

We will discuss the basics  

1.  Horizontal trend lines

2.  Diagonal trend lines

3.  Support and resistance

I would discuss Fibonacci's but Fibs will be another place and another time.  Fibs are not the basics until you really understand the simple stuff.

FWIW, the simple stuff will make you a lot of money.  You can apply these methods to anything you can chart so you can take these skills elsewhere.

Also, I use charts to teach with so you can see the application.  I won't give the definition of the 3 items listed above because you can find that anywhere on the interweb using your fancy computer machine.

Now the 3 items listed above are crucial to our success in the Forex game.  You will hear that you should only trade the trend, the trend is your friend, etc.  But how do you know what is a pullback in a trend or a reversal?  I trade reversals and then trade during the pullbacks of that trend.

You laughing?  Did you understand what I just told you I am gonna give you?  I know, it was a funny way of saying, "you are gonna buy low and sell high".

Thing is, everybody always says you should buy low and sell high so we will.  The timeframe we will use will be the Daily and the 4 hour charts.  Just learn it and then you can go trade the 5 minute.