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Trend Line Break - Trading Trend Line Reversal Signals

After price of Gold has moved in a certain direction for an extended period of time within a channel it reaches a point where price stops moving within the channel. When this happens we say that the trend line has been broken.


Since the trend line is the point of support or resistance then we expect the market to move towards the opposite direction after a trend line break. This is because the support or resistance level that the price has been moving along has now been broken. When this happens traders will close their open orders which they had bought or sold. This is called taking profit.

 

Uptrend Reversal - Upward Trend Line Break

When price breaks an upward line (support level) the market will then start to move down or start to consolidate at this level before moving down.

Upward Trend Line Break

 

This reversal signal is considered to be complete with the formation of a lower high or a lower low - double tops chart pattern. This also provides a trading opportunity for traders who want to sell Gold metal to go short once the trend line is broken.

 

 

Downtrend Reversal - Downward Trend Line Break

When price breaks downward line (resistance level) the market will then move up or start to consolidate at this level before moving up.

Downward Trend Line Break

 

 

This reversal signal is considered to be complete with the formation of a higher low or higher high - double bottoms chart pattern. This also provides a trading opportunity for traders wanting to buy to go long once the trend line is broken.


NB: Sometimes when price breaks its trend it might first of all consolidate before moving in the opposite direction. Either way it is always good to take profit when the market direction reverses.


To trade this trend line reversal setup as a trader once you open a new trade in the direction of the trend reversal the price should immediately move in that direction, in a price breakout manner. This means that the market should immediately move in that direction without much of a resistance.


If on the other hand the market does not immediately move in the direction of the price breakout then it is best to close out the trade because it means that the trend is still holding.


Another tip is to wait for the trend line to be broken and for the market to close above or below it so as to confirm this signal.


What happens is that most traders open trades waiting for a reversal even before the trend is broken, only for the price to touch this line and for the current market direction to hold and the Gold metal prices to continue moving in the current market direction.


Therefore, when trading this trend line break reversal setup it is best to wait until the breakout has been confirmed by price closing above or below the trend line, depending on the direction of the market.

  • Upward Market Direction Reversal - this signal is confirmed once the market closes below this upward trend line, this should be the correct time to open a sell short trade, so as to avoid a whipsaw.
  • Downward Market Direction Reversal - this signal is confirmed once the market closes above the downward trend line, this should be the correct time to open a buy long trade, so as to avoid a whipsaw.

 

 

Combining With Double Tops or Double Bottoms Chart Patterns

A good trade setup to combine this trend line reversal setup with is the double tops and double bottoms chart patterns.


This double tops and double bottoms chart reversal chart pattern setup should already have formed before the trend break signal. Because these double tops and double bottoms are also trend reversal signals, then combining these two setups will give Gold traders a good probability of avoiding whipsaws.


In the above chart examples these double tops and double bottoms chart pattern setups can be confirmed to have formed even before the reversal signal appeared.


First Example of Upward Direction Reversal - the Double tops chart pattern had already formed before the trend break signal appeared on the Gold price chart.


Second Example of Downward Direction Reversal - the Double bottoms chart pattern had already formed before the trend break signal appeared on the Gold metal trading chart.

Double Tops or Double Bottoms Combined With other Reversal Signals


 

Technical Analysis