What it looks like
In a falling market, join the last two lower swing highs with a straight line and extend it to the right. The line has capped every bounce. A candle then closes above it. Later, price returns to the line and holds above it.
What it means
The line that capped every bounce during the fall has been crossed, which shows sellers can no longer push each rally lower on schedule. On its own that only means the fall is weakening. The retest that holds is the first proof that buyers are willing to defend the line.
How to trade it
- 1
Draw the line through the last two falling swing highs.
- 2
Confirmation: a close above the line, then a retest from above that holds.
- 3
Entry: buy as the retest holds.
- 4
Stop: below the last swing low. Example on gold: line at 4,030 when broken, retest at 4,028 holds, last swing low 4,012. Buy at 4,032, stop at 4,009, a 23 point risk.
- 5
Target: the last swing high inside the fall, or 2 times the stop.
A close back below the line.
Where it works best
On 1 hour to daily charts after a clear, steady fall with at least two clean swing highs.
WickSpeak spots downtrend line breaks automatically and names them on the candles that made them. The note says what the break means, how to trade the retest and that a close back below the line proves it wrong. In Playbook you can use it as a condition in a play, alone or alongside other patterns and indicators (any of the 146 patterns can be a condition), and backtest it on past candles with your own costs.
Common mistakes
- Treating the break as a confirmed new uptrend.
- Buying the first close above the line instead of waiting for the retest.
- Drawing the line through wicks that do not respect it, so the break means little.
Related patterns
Questions traders ask
Does a trend line break mean the trend has reversed?
No. It means the fall is losing its grip. A rise is only confirmed once price makes higher highs and higher lows.
Should I buy the trend line break or the retest?
The retest is the safer entry. It shows buyers are defending the line, and the stop below the last swing low is clearer.
How many touches does a trend line need?
At least two swing highs to draw it. A third touch before the break makes it more widely watched.
What proves the break wrong?
A close back below the line. The fall's cap is back in place.