On the other hand, trendlines may take several different shapes, and they can range in terms of their length and weight. In this article, we'll look at a break of an 11-month trendline and examine a basic stop-loss method that may be employed when trading technical signals based on breaches of support or resistance. Both of these topics will be covered in more detail later in another article. These were the points in the past when the price moved in the other direction, and traders will frequently wait at these levels in the hopes that the same thing would happen again.

Broken Trendline

One of the most prominent signs that a trend is about to reverse is when the price makes a move that takes it through a recognized trendline. This occurred on the stock chart for NVR Inc. (NVR), which shows the company's stock price. it is often important to pay attention to volume because it would likely be the first signal of a reversal in the trend. For technical traders, a low volume may sometimes be a reason for worry since it may imply that bears were not as enthusiastic about driving the price down drastically as most anticipated. Given the low volume and lack of volatility. This may be done by waiting for the stock to make a new high or low above the Broken Trendlines.

In the instance of NVR, the price began to go downward, and with this movement came the confirmation from a technical perspective that the breakdown was legitimate. The bulls attempted to re-enter the market by driving the price closer to the barrier that had just been established as resistance, but an onslaught of selling greeted this move. The retest of the resistance, also known as a flashback, is a regular occurrence in trading, and the failed advance higher is often the last piece of confirmation required by traders hoping to benefit from a downturn.

No Man's Land

On the other hand, taking a profit is not as simple as it would first seem. When a company is trading at a price roughly in the middle of key levels of support and resistance, a trader's work is much more challenging since, from a purely technical standpoint, the stock may go in either direction. The questions that arise in the head of the trader arrive quickly: "Should I take a profit when the negative momentum starts to slow down?"

The next couple of months saw NVR follow a downward trend, as seen in the chart below, and the price eventually settled in the vicinity of $560. It is essential to point out that the additional percentage gain from $600 to $550 comes at a significantly higher cost. This is because the trader knowingly risks giving up a healthy gain if the stock could find some unexpected strength. As a result, the cost of the trade was substantially higher. If a trader does not have a specific goal in mind, it may be prudent to close some or all of their positions at a junction like this and hunt for a trade that has a greater chance of being profitable.

A Strategy for Managing Stop Losses

When employing trendlines as a foundation for a trade, there is also a technique that traders may consider as an option. Previous highs and lows of swings provide a useful indication of probable locations that might affect the stock's momentum. These were the points in the past when the price moved in the other direction, and traders will frequently wait at these levels in the hopes that the same thing would happen again. One strategy would be to place a stop-loss order above the previous level of resistance (in the case of a short position) and then trail a stop order behind the price as it breaks below the lower price levels.

Example

Traders with a greater degree of risk aversion or a long-term investment horizon would find it more advantageous to put a stop order above the resistance that can be located two price levels higher than the present price in the given an example. The retest of the resistance, also known as a flashback, is a regular occurrence in trading. This would provide the supplied security with a greater opportunity to fluctuate, and it is done so to benefit from sustained negative falls. It is essential to remember that if the stop price is hit, this particular technique implementation will result in higher losses. Still, it also has the potential to result in larger winnings.