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How do you notice when the downtrend breaks when you’re trading currencies online? You take what you know about currency trading buy and sell zones and apply them to a breaking downtrend.
Before you can start trading currencies, you need to know when the downtrend breaks.
A downtrend is considered broken if the following conditions are met:
1.The market makes a new low.
2.The market first penetrates the trendline.
3.The market then retraces to the last level of resistance.
When the downtrend is broken, the market enters the buy zone, which is the area above the trendline.
When trading currencies that the trendline is only considered broken if all three of the conditions are met. That is, the market must have made a new low prior to piercing the trendline or it is not considered a trendline break.
Broken Downtrend when Trading Currencies Online
Trading Currencies in the Buy Zone
Trading currencies in the buy zone is one way to take advantage of a downtrend break. To trade currencies in the forex online when prices enter the buy zone, wait until a complete bullish candle forms above the trendline (it must completely clear the trendline, wick and body).
The Buy Zone for Trading Currencies
Take care to wait until the candle has closed to call a trendline break; otherwise you may fall victim to a false spike. When the bullish candle appears in the buy zone according to the conditions stated above, place a market order to buy at the opening of the next candle (if equity management allows).
Set your stop loss order at the last level of support.
Forex Price Chart showing a Broken Downtrend
Rules for trading currencies in the Buy and Sell Zones
As with every indicator, there are several important rules to follow when trading currencies in the buy and sell zones:
1. Draw all trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
2. Locate the downtrend (uptrend) break and the bullish (bearish) candle in the buy (sell) zone that confirms the break.
3. Find the last level of support or resistance to determine where to place your stop loss order.
4. Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
5. Create a plan for trading currencies. Trade the plan.
In addition to those important rules, it is also important to decide before every trade whether you will be a day trader or an overnight trader.
A day trader will stay in the market (on that trade) for a short amount of time (a couple of pips, perhaps) whereas an overnight currency trader will remain in the market for three or four days, canceling and replacing to lock in profits.
Remember that when the inner trendline is broken the market predominately (most often) moves to the outer trendline and bounces there. One way to estimate the potential profit to be made if you are trading an inner trendline break is to calculate the difference between the inner and the outer trendlines. If there is not much price difference between the two lines, you will likely not make much profit trading the inner trendline break.
When both the inner and the outer trendlines are broken, that is a sign of a major reversal. That the inner and the outer trendlines broke indicates that the market is not in a price swing within a larger continuing trend, but that the larger trend itself is breaking.
When currency trading online in the forex market it’s helpful to understand where the buy and sell zones are. Along with trading trends and trendlines, this helps you as a forex trader to identify potentially profitable forex trades.
Buy and sell zones, generally speaking, exist when a trend has been broken in currency trading. To identify and trade buy and sell zones, then, you must be able to identify a trendline break.
The Broken Uptrend
Remember that the trend is your friend until it bends when trading forex online. That is, if you are in the currency trading market trading a trend, then it is your friend until it bends. Bends can also be your friend, however, if you learn to spot them and learn how to trade the trendline break (entering in the buy or sell zone).
An uptrend is considered broken if the following conditions are met:
1.The market makes a new high.
2.The market first penetrates the trendline.
3.The market then retraces to the last level of support.
When the uptrend is broken, the currency trading market enters the sell zone, which is the area below the trendline. Remember, however, that the trend is only broken if the market has made a new high. You will see certain cases where the market pierces the trendline but does not break it when you are trading forex online.
To be a true trendline break the forex market must bend after it has made a new high.
Watch for this broken uptrend when you are trading forex online:
This trendline break can be used for currency trading online
Trading the Sell Zone
When currency trading the sell zone is one way to take advantage of an uptrend break. To trade the sell zone, wait until a complete bearish candle forms below the trendline (it must completely clear the trendline, wick and body). Notice the sell zone in the picture below:
The currency trading sell zone
Take care to wait until the candle has closed to call a trendline break; otherwise you may fall victim to a false spike. When the bearish candle appears in the sell zone according to the conditions stated above, place a market order to sell at the opening of the next candle (if equity management allows).
Set your stop loss order at the last level of resistance
Forex chart shot of a sell zone when trading forex online
Techniques which can be applied to up trends, can also be applied to downtrends. Tomorrow I will share with you another example of how you can apply this strategy to currency trading online in the forex market.
It’s Saturday morning and I just poured a cup of coffee. Even though I prefer trading days, I do like the forced break of having no forex trading with weekends off!
Today I’m going to give some quick tips about trading trendlines, then I’m off to the beach to surf some non-forex waves
When looking at trends, remember the following:
- Draw your trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
- Locate the price at which you anticipate the market will bounce (at the trendline).
- Find the last level of support or resistance to determine where to place your stop loss order.
- Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
- Create a trading plan. Trade the plan.
Follow these rules and you’ll prevent yourself from lots of dumb mistakes. If you find that you can’t follow a rule, it’s telling you not to trade. If you can’t draw trendlines, anticipate a market bounce, find support or resistance levels, trade within proper equity management guidelines, or create a trading plan….
JUST DON’T TRADE!!!
The time will come when you can follow these rules and the forex will still be there.