Trend Lines are the most powerful technical analysis tools. They have existed in the markets for centuries and have proven themselves as a reliable trading tool. In this article you will learn how to predict a breakout of a trend line, in order to enter faster and earlier.
Despite being a reliable and consistent technical tool, trading trend lines is not so easy. A trader needs to identify the trend lines properly and to decide on a trading strategy. The most popular trading strategies are the bounce, and the breakout. While the bounce is a contrarian strategy, the breakout is a simpler one — that signals a trading signal when a trend line is broken — and a trade is entered in the direction of the breakout. Still, entering a trade at the breakout itself can be risky as price can retrace back. Trader that trades breakout needs a early alert of a breakout — and signals for the upcoming breakout will be now explained.
Breakout Sign #1: Strong Momentum
The first sign of a breakout is strong momentum. When price is advancing towards the trend line in bigger and faster candles, it may be a sign of a future breakout.
Breakout Sign #2: Rising Volume
A rising volume can be a strong sign of a breakout — rising volume indicates that the forces of the market are gaining strength and that the momentum is getting stronger. Volume preceeds price in its trends, therefore a rising volume can predict a rise in price — that will lead to the breakout of the trend line. A combination of a rising volume with rising momentum is a strong sign of a breakout and in such market environment it is recommended not to trade counter-trendline (bounce).
Breakout Sign #3: Lower Highs or Higher Lows
This is the last and final predicting sign of a trend line breakout. If the trend line is ascending, lower highs indicate that sellers are gaining strength and pushing prices lower — to a breakout downwards. The same is true with descending trend lines and higher lows. This is a very powerful sign that is also useful for support and resistance levels.