One important part of price action trading is trend lines. In this post, you will learn about how to trade with trendlines, especially, how to trade with inner and outer trendlines.
If you don’t know what inner and outer trendlines mean, keep reading because it is kinda important as well for you to know this.
I will explain in this post why it is important.
The forex trendline trading strategy is based on trading price touches on trendlines. In the trendline trading strategy, what you do is draw trendlines and wait for price to reach it. Once price reaches and touches that trendline, next thing you do is wait for bullish or bearish reversal candlesticks to form giving you the signal to place your pending sell stop or buy stop orders. And if price breaks the the high/low of those reversal candlesticks, you stop orders get triggered and a trade is activated.
Then there are other trendline trading strategies that are also based on trendlines like these:
If you don’t know what inner and outer trendlines mean then this chart below will give you a much better idea:
So what is the difference between the outer and inner trendlines?
- the outer trendline is the trendline drawn based on the larger timeframe using the larger or main price swing points ( the big swing highs/swing lows)
- the inner trendline is the trendline drawn based on much smaller price swings that can be found (1): within the larger timeframe that the outer trendline is drawn on or (2) it can be the trendline that is drawn on a much smaller timeframe and it still stays WITHIN or inside the outer trendline.
Put it this way…the inner trendline is any trendline that is drawn from swing high or swing low points that are found WITHIN THE SHADOW of the outer trendline.
Because price can respond to both.
That’s why it is important that you be aware of it. In order for you to understand that, you need to know the 3 types of trading setups that can happen.
Setup #1: Price Breaks The Inner Trendline And Obeys Outer Trendline
Lets look at this daily chart of EURJPY to learn some lessons about inner and outer trendlines and why you need to be aware of them when trading: in this chart, notice that price broke the inner trendline and went up, hit the outer trendline and then bounced back down. Price obeyed the outer trendline instead of the inner trendline.
Setup #2: When Price Obeys The Inner Trendline And Does Not Reach Outer Trendline
Here’s a chart showing price heading up to the outer trendline but price had to fight against two inner trendlines. This time, the two inner trendlines won pushing back price down:
Setup #3: When Inner and Outer Trendlines Intersect and Price Also Meets Them Just Around That Region
There are two possibilities here:
- There will be times when price will meet the the inner and outer trendlines exactly at their INTERSECTION point.
- There will also be times when price will get to that intersection point of the two trendlines a little bit later but you need to make sure its is not too far away.
I really like to trade this setup when such situation like this happens because now I have a confluence of two trend lines meeting price at just about the same point. In addition to that, any reversal candlestick signal generated at that point tends to be really high probability.
Here’s an example showing such a situation:
- the white trendline is outer trendline
- the yellow trendline is inner trendline
- notice the intersection point and right after that, price happens to touch both trendline and price shoots up making 400 pips move.
The outer trendline is the more important trendline.
From my experience, I tend to be a bit cautious trading off inner trendlines WHEN the outer trendlines is within easy reach of price because many times I will place a trade on the inner trendline and the trading setup would be perfect but then later price breaks the inner trendline and starts heading for the outer trendline and once it hits the outer trendline, it obeys it.
I think because of the importance of the outer trendline, it acts like a much stronger magnet pulling price towards it much more strongly than would a inner trendline.
So should you stop trading the inner trendlines?
No…not at all.
I will trade inner trendlines if:
- the outer trendline is far away from the inner trendline,
- I see a really good reversal candlestick pattern form at the touch of the inner trendline but the thing is I will keep my stop loss tight and I’d be moving my stop loss to break-even as quickly as I can and lock some profits (If I can) because I know that price is hugely attracted towards the outer trendline.
So if my trade on the inner trendline happens to be a losing trade as price breaks the inner trendline and starts heading for the outer trendline, then I’d be waiting to trade again as price hits the outer trendline.
Hope you learnt something new with this post about how to trade with trendlines using the inner and outer trendlines.
You can trade both the inner and outer trendlines.
But remember, the outer trendline has much more influence to pull price towards it than the inner trendline should you decide to trade the inner trendline.
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