The Validity of the Trendlines When They Become Too Long
Technical analysis rules are clear and strict, but applying them in real trading needs a lot of experience.
One of the things that makes novice traders make mistakes and lose money is the trendline.
Sometimes you see that there is a nice and clear trend with a good looking trendline. You plot it on the chart and wait for its breakout. Once you enter the market after the trendline breakout, the market goes against you and hits the stop loss.
You wonder why it happened because everything looked good and the trendline looked so valid and strong. But how come didn’t the market pay any attention to its breakout and behaved as if it didn’t exist?
One of the reasons is that when the trend and so the trendline, become too long and continued, specially when the first and the second point you use to plot the trendline are too far from each other and also from the current market price, although the trendline looks valid, the market doesn’t respect it as a strong support or resistance. Therefore, its breakout and retesting will not be valid too.
It means, the price breaks out of the line and you think the breakout you have been waiting for has finally formed, but then the price goes the other way and the broken trendline doesn’t behave as a support or resistance.
This happens a lot on the huge and liquid markets like the currency market, and it happens less frequently on the stock market. The reason is that each stock market has a special and known volume and capacity and the price moves based on the buy/sell activities between the limits of that volume and capacity.
But in currency market there is no special volume. Money floods in the market from unknown resources every now and then, and it can change all the parameters all of a sudden.
Therefore, when a trend becomes too long and the first and second point of a trendline are too far from the current market price, the market forgets about the trendline and its exact place because the market parameters are changed since the first and the second points have been formed.
GBP/CHF daily chart downtrend is an example.
You think that the market will react accurately when it reaches the downtrend resistance line?
I don’t think so. The first and the second points are too far from each other and also from the current market price. By the time that the price reaches the trendline, it will be even more away from the second point because it is currently hundreds of pips below the trendline and it has a long way to get there.
Therefore, I won’t pay any attention to this trendline and the market’s reaction to it.
Even the shorter resistance line (the dashed line) can be like that. The first and the second points are far and the market’s current price is so close to the line and it is possible that it hits the line very soon to form the third point probably or break above the line. You have to be careful and make sure that the market officially respects the line and knows it as a resistance and then a support after the breakout, otherwise the line will be invalid.
What Is the Solution?
One solution is that you don’t trade through technical analysis as long as you haven’t become experienced enough in it. It takes time to become good in technical analysis and you can’t trade through it after a few months or even years.
To reach to that level, you can trade through the easier systems like candlesticks. Although they also need experience, they are less complicated than technical analysis.
The other solution is that you don’t trade a line breakout as long as the market hasn’t proven that the line and its breakout are valid. Even in that case, a reasonable stop loss and exit strategy is always a must.
Good luck 🙂