This is a mandatory condition for any trade that you enter into the market when trading a range. Trend lines are in fact diagonal support and resistance levels. Let’s see a chart to illustrate this.
In this example you have the upper boundary already formed and you draw the lower red line in expectation that price will find support there and reverse to form the lower boundary of the range and give you a range trading opportunity.
Very often, in its travel from one boundary to the other, price will make small correction moves before continuing its journey to one of the boundaries.
These corrections or pullbacks create little swings in the market that you can connect with a trend line exactly like in the chart above.
When trading a range you should always look to see if there are any swings that you can connect with a trend line before entering the trade. These trend lines are actually pretty strong resistance or support diagonal levels and until price closes outside the trend line you should not enter the trade. In the diagram above, a long trade would be entered only when a candle closes above the trend line.
You should always do this if you want to have a very high success rate of winning trades. These diagonal support and resistance levels are in fact obstacles that price will have to overcome in its way to the other boundary of the range.
For a trade to have 99% chances of success you have to make sure that there are no obstacles between your entry level and the take profit level. Let’s see
another example, this time with a diagonal support level.
In this example you also have a double top reversal pattern which strengthens your view that price will reverse its direction from here. You look for the small swings or pullbacks that price made on its way to the upper limit and join them with a trend line.
No matter what happens there at the red line, how many signals the candles give you or how many reversal patterns form there, you do not enter a short trade until a candle closes below the trend line.
Out of the three tools you employ to read the price signals, the candlesticks, the price patterns and the diagonal support and resistance, the last one is mandatory, you always have to make sure that the price has surpassed all obstacles in its path and there are all the chances in the world that it will go smoothly to your take profit level.
The candlestick signals and the price patterns are very important tools also as they strengthen your view of the market and they give you confidence that price will do exactly as you expect it to do.
Usually, after you identify the swing high-swing low inside the territory of recent price action and you start drawing lines on the chart expecting for the second boundary to form, at least one of these two price action reading tools will show themselves at your key level and give you signals that a reversal is about to happen.
If, apart from a candlestick signal, you also have a reversal pattern that takes shape at your level, it is even better as this confirms and reinforces what you already know, that a reversal will happen and price will go to the other range limit.
The more signals you have from different sources that tell you the same story, the more confident you should be that the trade you are about to make will be a winner.
If you have only a candlestick signal without a pattern, or a pattern without some clear candlestick signals it is perfectly okay, as long as you remember to always draw the trend line if there is one to be drawn and wait for price to close outside of it before entering the trade.