In this series we will piece together the anatomy of a swing trade and discuss the tools along with the methodology used to construct a basic trade setup. While no one single strategy is perfect, these best practices can be utilized in conjunction with your own trading strategy to identify more favorable entry / exit points in trending market environments.
Trendlines are the simplest and single most important (and largely underutilized) tool in your trading arsenal. Extending a line off key highs & lows in price is an objective way of assessing the gradient or slope of a trending market. This key step can help identify where the price is likely to find support (floor) or resistance (ceiling).
DXY Daily Price Chart
Note that trendline analysis can be viewed as more of an art form than a science as it requires some form of subjectivity. That said, when drawing trendlines, the more touch points the market has, the stronger conviction the slope offers. This means that the reaction off the trendline (slope) becomes increasingly effective.
In the example of the U.S. Dollar Index[1], the positive slope casts a bullish outlook, with the broad game plan to buy as price trends higher. So where should our entry point be? A pullback into trendline support would be the most favorable entry
With the same respect, a break often offers sharper and more significant reversals. Once a trendline support is broken, the slope now becomes resistance for prices, and often foreshadows a change in market behavior. This slope can now be seen as a reference of invalidation for the current move lower.
AUD/NZD Daily Price Chart
Likewise, a breach above a trendline resistance sees that line as support for the subsequent move higher. The AUD/NZD[2]
