As a trader, you should be familiar with trendlines. Trend lines are one of the most reliable indicators in the arsenal of a forex trader. When you combine these trend lines with candlestick patterns, you get a powerful combination.
When you combine a bullish trendline with a bullish candlestick pattern or a bearish trendline with a bearish candlestick pattern, you will get a pretty accurate signal that tells whether you should stick with a position or exit it.
When you spot a trend continuation pattern forming above or below a trendline, you can safely continue with your trade for more profits. In the same manner, when you spot a trend reversal candlestick pattern above or below a trend line, you should take it as a warning and exit an open position.
There are simple candlestick patterns and there are complex candlestick patterns. Now, there are candlestick patterns recognizer indicators available that you can install on your charting platform. These indicators can accurately identify a candlestick pattern. When you combine, this candlestick pattern with the trendline, you get a good confirmation about trend reversal and trend continuation.
Trendlines are very important in making entry and exit decision. If you use them correctly, you can make profitable trades.
Now, you might be thinking how to use a trendline to define your exit stop level as it keeps on moving frequently. You will find the trendline changing daily on the chart. A good risk management strategy is to determine the support trendline in an uptrend or a resistance trendline in a downtrend and place an appropriate stop that is good for the day.
Another approach is to use a closing price at the end of the day to decide whether to continue with the trade or exit. If the closing price has broken the trendline, simply exit the trade. The problem with this strategy is that when you check at the end of the day, the price might have gone further than you might had wanted.
However, the price can dive and close much lower or higher than the trendline at the end of the day making your exit much lower or higher than if you had used a stop loss. It is up to you to decide which method fits your trading strategy and style best.