Trading a Trend Break
Figured I’d write this because these trend breaks tend to lead a lot of people to profits from what I’ve observed.
So, let’s get right to it shall we?
What is a Trend Break
Without being facetious, it’s essentially a ‘break’ in trend.
_
What’s a Trend?
It’s exactly what you imagine a trend to be. It’s just a general pattern of price action.
Trends typically trend upward or downward.
Below is an example of a downtrend:
This isn’t drawn exactly, but you can see what’s going on.
How Do You Deterimine Trend?
#1 — Drawing Trendlines
That orange line above is a ‘trendline’. This is one way that we can determine whether there’s a definitive trend or not.
Source: https://learn.tradimo.com/technical-analysis/trend-lines
How to Draw Trendlines
Here is an example of how to draw trendlines. Typically the trendline that you draw should be one where the price has hit multiple times.
There are two rules that you need to remember when drawing trendlines though:
- ) In order to create a trendline for a downtrend, you need to draw the line across the top.
Like so
2.) In order to create a trendline for an uptrend, the line should be drawn underneath the candles — like so:
Like so
2 — Indicators
So, almost all lagging indicators in the world
Source: http://www.visualcapitalist.com/12-types-technical-indicators-stocks/
So, the lagging indicators in question are:
- Moving Averages
- MACD
- Bollinger Bands
- Average True Range
The true indicators that will really help you determine the trend are:
- MACD
- ADX
- DMI (includes ADX)
- Aroon UP / Aroon UP>Aroon DOWN
We’ll get into how you can do so with these indicators a bit later.
Now, you may be wondering:
How Do I Trade Trend Breaks?
Great question!
The easiest way to do this will be through the use of trendlines. Let’s take another example.
If the price breaks above where that red line is, then you can consider that a potential trend reversal.
This does not mean that the price is in an uptrend now. It simply means that the downtrend has been broken.
It’s possible that the price may continue to trade sideways.
Let’s check out an example of such a break:
Above is an example of a trendbreak
One of the key features of a trend break is a spike in volume as the price breaks above the trend:
You can see this occur above
Now, there’s no guarantee that the price shoots in that direction. Sometimes it will stall after it breaks trend before it continues further up. Or there are times where it may even break back below the trendline.
However, this is not too frequent in the land of cryptocurrency.
Thus, when there is a break in trend, this is seen as a major buy signal. Especially, when that downtrend has occurred for a long period of time.
Watching Out for Bull Traps
This is why it’s critical to make sure that you avoid bull traps at any and all costs.
“What is a Bull Trap?”
Source: https://www.investopedia.com/terms/b/bulltrap.asp
So, essentially this is when traders take a ‘long’ position in a crypto in anticipation that it will break the trend before it actually does break trend.
The concept of a bull trap shows why this is dangerous. If you’re incorrect, then you stand to lose a substantial amount of money.
Conclusion
Just another one of many articles that will be releasing in the coming times regarding TA & other trading strategies.
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