In the FX Power Courses we identify buying opportunities as a pullback down to support when the market is in an uptrend. We also identify a rally up to resistance while the market is in a downtrend as a good selling opportunity. We also show how trendlines can be used effectively to identify potential support and resistance.
To draw a trendline on a chart, you need to connect two lows in an uptrend or two highs in a downtrend. By connecting those two points and drawing the trendline out to where the market is currently trading, we are projecting a potential area of support or resistance. If the market moves to test the trendline once again, many traders will enter into the trade as close to the trendline as possible and place their initial protective stop below that trendline. This allows you to keep your risk fairly small and increase the size of your potential profit.
We can see on the example below how the market moved down to test support at point #3, reversed and continued to move up. If you placed your stop about 50 pips below your entry, you give the market room to breathe along with a chance to earn three to four times that risk in profit. This means traders would only have to be right one out of three trades to be consistently profitable. That is what professionals look for as the base of a solid trading approach. The key is going to be having the patience and discipline necessary to wait for the solid setups and not hesitating to open the trade as the market tests the trendline. But as always, remember to only trade in the direction of the trend on the daily chart. That will increase your chance of success.
