Trend line breaks are defined as the price moving towards a trend line, touching the trend line, and then breaking through the trend line, and continuing in its new direction. Trend line breaks happen because trend lines show where the price is likely to experience support or resistance in the future, and at some point this support and resistance is going to weaken.
Trading Trend Line Breaks
Trend line breaks are counter trend trades, because they expect the price to continue in its new direction (against the previous trend). For an upward trend line (and an upward trend), a trend line break would be a short trade, where the trader sells at a price near the trend line, and then buys at a price below the trend line. For a downward trend line (and therefore a downward trend), a trend line break would be a long trade, where the trader buys at a price near the trend line, and then sells at a price above the trend line.
Trend line breaks are not usually traded independently, but are combined with other trading information, such as price movement or volume information. For example, a complete trend line trading system might consist of a trend line break in combination with strong volume in the correct direction.
Example Trend Line Break
The example chart shows a downward trend, and its associated downward trend line, with a trend line break shown in yellow (view the chart in full size).
