Many of you might ask at this point “What is considered a valid penetration of a trendline?”
Well, there are different ways to determine that, and we’re happy to fill you in!
For starters, 2 consecutive lower closes below the up trendline will signal a reversal to the downside.
Similarly, during a downtrend, 2 consecutive higher closes will signal a reversal to the upside.
Basically, the candlestick bodies of the 2 consecutive closes should be of an average-at-least size to convince that the market is determined to move the prices in the corresponding direction.
Note that too small candlestick bodies show indecision!
Another way to determine a valid breach of a trendline is the 3% rule.
In simple words, this refers to a violation of 1-3% before calling it a valid penetration.
The 3% rule may apply to higher timeframes where the 1% violation may be more appropriate for lower timeframes!
Wondering how to draw a trendline using the close or high/low prices?
Good! That’s the topic of our next article!
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