When is a Trend Truly Broken?The importance of trend lines cannot be overstated when it comes to technical analysis. We are told to trade with the primary trend, exit when the trend reverses, enter on trend reversals, and so on. Trends are easy enough to identify, but when is a trend actually broken? Ask ten trades and you'll get ten different answers. This lesson will try and illustrate a few of the most common techniques used to identify trend line breaks. The first technique is the easiest to understand - a trend line break occurs when price penetrates the trend line. Another technique that waits for more reversal confirmation is to use the Two Day Rule. The Two Day Rule states that price must close through the trend line for two successive days. Another method to validate a trend line break is the 3% Rule. This rule states that price must close 3% through the level of the penetration to be considered a break. These three methods represent basic ways of
telling if a trend is reversing. There are quite a few other
methods as well, but basically the best rule of thumb is not to
worry too much about "connecting the dots" and look for good
confirming moves through trend lines. Being late on a good trade
is always preferable to being wrong. |
