The Right Way to Use Lines in Trading (Part 2)
04/14/2009 10:33 am EST
I have been working with lines as my main trading tool for more than 38 years now. Lines are simple, lines capture the probable path of price well, lines work over and over and over. My favorite lines are the three parallel lines that make up Median Lines, but I work with all sorts of lines in my trading.
Now let's look at the first line tool: The simple trend line.
Simple trend lines can be very powerful trading tools; if you apply quality money management and some simple trade entry techniques. When I sell against a trend line, I always ask myself: “Can I afford to hide my stop loss buy order above the limit entry sell orders at a prior swing high?” These limit sell orders act as a buffer to slow the rise in price and should act as protection for my stop loss order.
If I am buying against a trend line, I always ask myself: “Can I afford to hide my stop loss sell order below the limit entry buy orders at a prior swing low?” These limit buy orders act as a buffer to slow the fall in price and should act as protection for my stop loss order. If I can't hide my stops behind prior swing highs or lows, I generally do not take the trade.
You can see I found some very nice trades in this downtrend, and all of the short trades except the final trade hit their profit targets. The final trade was profitable, but was exited at a profit stop hiding above a swing high.
I use the same entry and exit techniques, the same money management style, and the same risk/reward ratios when trading using simple trend lines as I do when trading using Median Lines. You can make a lot of money trading using simple trend lines if you know how to use them.More tomorrow in Part 3.