Trend trading strategy might be the most effective way to make a profit but very few traders know the perfect way to draw the trend line. The trend lines are drawn with the wrong concept and the traders are losing money. After failing to trade the major trend, rookie investors start blaming the market. Forex market is the largest financial market in the world and it’s free from manipulation. No one can manipulate the price feed, so there is no reason to blame the market. After you finish reading this article, you will find many common mistakes associated with the trend line trading strategy. Let’s how we can trade the major trend lines like a pro.
Drawing the perfect trend line
Drawing the perfect trend line depends on two factors. First of all, you have to select the daily time frame and secondly, you need to connect three major swings of the market. This is where most of the traders make the mistake. Some of them are using three points but using the 1-hour time frame. Some are relying on two points but using the daily time frame. So, you now know the optimum way to draw the trend line. While you are drawing the trend line stop trying to forcefully join the three points with a straight line. If you do so, you will never get the exact support and resistance level.
Looking for the trade signals
The trend line acts as an excellent support and resistance level. But placing the trades by using the limit orders is not a great idea. You should look for price action signals. Does that mean we need to learn price action trading method? Well, you don’t have to get into the details of the price action strategy rather having some knowledge on the most reliable candlestick pattern will do the work. Use the Forex demo accounts to develop your knowledge of candlestick patterns. Once you start to understand the psychological reason behind the formation of different kinds of candles, you won’t have to memorize the complex candlestick patterns.
Analyze the risk to reward ratio
The price action trading strategy is mostly used to find the perfect stops for each trade. Though the trend line gives an excellent profit-taking opportunity, you must be prepared for a trend reversal. If for any reason, price breaks above or below the tail of the confirmation candlestick, you should consider it as a warning of a trend reversal. Though it might be a false break, still you should try to place another trade at the trend line. Remember, opening a new trade right after losing a trade usually results in a loss. So, walk away from your trading platform and take a small break.
You now know how to place the stop but what about the risk to reward ratio. Usually, the risk to reward ratio should be set 1:5+ when you trade the major trend. However, if you trade the minor trend, keeping the risk to reward 1:3 gives you a better chance to win the trade. The experienced traders can also use the trailing stop loss to maximize the profit in trading. If you do so, make sure you are not killing the risk to reward ratio by using these features too early.
Backtest your trading strategy
Noting in this world is perfect. Once you have developed the trend trading strategy using our guideline, you need to backtest the strategy. Use the demo platform or simulation software and see how it works. Make sure you test the strategy based on 30 trades (minimum). Unless you have a 70% win rate in the testing stage, you should not use the strategy. Try to find the weakness in the strategy and improve your execution process. If required forget about the use of trailing stops since it reduces the win rate in the choppy market. Use the simple technique and see if you can make a profit in demo accounts.