Let me be honest here. The successful application of the trendline trading strategy depends a lot on you drawing quality and valid trendlines. You just cannot afford to mess up with this, ok? You’ve got to be precise, spot on. Here are some common mistakes I have observed from many traders asking me if they were drawing the right trendlines or not.
Mistake#1: Drawing trendline through an obstruction.
There should not be any price obstruction between point 1&2. This is highlighted by the blue area with an “x”.
Similarly for drawing upward Trendlines. Between point 1 and 2, there must be no price obstruction.
Mistake#2: Drawing Through Wick and Body of Candlesticks
Some beginners draw a line through the general direction of the trend. They break all the rules here. If the trend line is drawn and crosses a lot of wicks and body of candlesticks, it does not give you any information regarding where the support or resistance level is located. This is a wrong way to draw a trendline.
Mistake#3: Not drawing a New Trendline and Keeping a Breached Trendline
This is the case where there is a FALSE break or breach of a trendline and then market continues in the original trend direction it was heading previously.
If the price breaks the trend line significantly, that trend line is no longer valid. If the market continues in the same direction, then a new trend line can be drawn as shown in the chart below based on the new high (or low) that is formed.
Question
Ok, what if the breaching is not significant? What if price forms a high (peak) or a low (trough) after breaching or intersecting a trendline (not significantly) BUT later goes back and continues to obey that trendline...should you keep the existing trendline or draw a new one?
Answer
The best practice is to draw a new trendline.
However, even in saying that:
- I usually keep the breached trendline because price is still obeying it and I would ALSO draw the new trendline using the new high or low point that was made.
- My reason for keeping the breached trendline is based ONLY on: HOW FAR the price has moved in relation to the trendline that was breached.
- If significant like the above chart, I will not keep that trendline.
Why do I do that? I will show you why. See the chart below?
Price breached and made a low under the red trendline and then came back up and started to obey this trendline again and sometime later, an opportunity to Buy for a 2nd time was presented which could have resulted in a highly successful trade.
If I had removed the first trendline (red) simply because it was temporarily breached, I would have missed out on taking a nice trade setup.
That’s why I would still keep breached trendline depending on how far away the price has moved and also pay close attention to candlestick patterns around this kind of setup as well.
Question
How Far Away in Pips is reasonable to keep a breached trendline?
Answer
Quite Difficult to give an exact answer on this because the “how many pips” also depends on the timeframes. So, for example: in a 5min timeframe, keeping a breached trendline which is 5-10 pips away is still ok but won’t be ok if it’s like 30 pips. In 1hr timeframe, 20-40 pips are reasonable. In 4hr timeframe, keeping a breached trendline 40-60 pips will still be ok because it is a larger timeframe.
Mistake#4: Drawing Trendlines that are NOT touching the peaks or troughs
This is one major mistake that I have observed a lot. What happens is that traders fail to actually connect the 2 peaks or troughs that are required to draw a trendline. The trendline MUST touch these two points that you use to draw the trendline.
If you fail to do this properly, you will have situations like shown on the chart below where the trendline is not touched and price moves away from it... AND... if you were waiting for a touch of trendline so that you can enter...Guess what? You will NEVER get it!
The above information was derived from our Trendline Secret Strategy eBook
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