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Trading Price Action Using Line Charts (Old School Forex & Stock Trading Strategies) - YouTube
Channel: The Secret Mindset
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Today with the advances in technology, traders
have developed highly complicated trading
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methods, with sophisticated graphs.
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Let me tell you this: the best methods used
by successful traders are quite simple.
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A simple method is easier to understand and
easier to implement.
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Back in the early days of technical analysis,
things were a bit more difficult.
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Traders had a hard time building trend indicators
or oscillators, so the focus was on trading
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theories and concepts.
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Now 99% of traders use candlestick charts
mostly (including myself), at least one trend
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indicator, maybe an oscillator, which are
even more complicated in their nature.
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Instead of keeping trading simple, we overcomplicate
technical analysis by following too many signals
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generated by conflicting indicators or programs.
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But it wasn’t like that back when technical
analysis started.
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Bar and line charts, for instance, dominated
the industry, as professionals and retail
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traders used them.
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Despite everyone using Japanese candlesticks
techniques applied on candlestick charts,
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the simplest kind of charts contain only a
single line.
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Just one line is enough to filter the market
noise, which is one of the reasons why most
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of the retail traders fail.
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A line chart is the simplest type of chart,
representing the trading instrument’s closing
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price on each day.
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This type of chart offers traders a clean,
easy to understand view of the instrument’s
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price.
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The interpretation of line charts is simple.
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They are basically price charts that connect
the closing prices of a given market over
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a span of time.
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As the line charts only show closing prices,
they offer a great value to traders by reducing
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noise.
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This chart is also good for visualization
of the overall trend of a currency pair or
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stock.
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Charles Dow, the developer of Dow Theory (the
groundwork for technical analysis), was only
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interested in the close of the instrument.
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Dow believed that plotting a record of highs
and lows tends to obscure the real value of
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the security/ stock, which is settled only
by the close.
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For instance, here is the daily EUR USD chart.
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It shows the price action on the pair by displaying
one single line.
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This line connects the daily closing prices
and results in this simple and easy to understand
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chart.
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So, how to trade line charts.
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The simplest method is to trade line charts
trend lines breakouts.
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Trend lines are straight lines drawn on a
graph connecting support points for an uptrend
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or resistance points for a downtrend.
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A trend line may rise, fall or move sideways.
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Trend lines connect two or more support points
that define the trend.
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As we all know, drawing trend lines is quite
subjective, is not a precise science.
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Draw them correctly and you’ll have an edge
over the market.
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How to draw the best trend lines?
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Or, more important, how to draw trend lines
correctly?
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This is one of the most common questions among
traders.
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Of course, we need at least two points in
the market to draw a trend line.
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Once the second swing high or low has been
identified, we can draw our trend line.
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Using candlestick charts, we have a situation:
should we use the low of the candles?
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Or the close of the candles?
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With line charts, drawing a trend line is
an easy task.
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You don’t have to worry about it.
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Look how easy you can spot and draw the trend
lines.
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No more confusion.
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Another simple approach is to look for trading
patterns
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Chart patterns are one of the most effective
trading tools, used by traders to identify
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continuation or reversal signals, to open
positions and identify price targets.
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Line charts offer a good visualization of
the patterns.
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If you pay attention at this example, we can
clearly see:
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• several continuation patterns – a descending
triangle and an ascending triangle, signaling
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a continuation in the underlying trend
• one reversal pattern – head and shoulders,
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indicating a possible reversal of the underlying
trend
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Of course, a line chart should not be used
by itself, as it does not provide enough price
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information and for this reason, other complementing
tools must be added.
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It’s easy to read a line chart, looking
at past history, but in real time, reading
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price action and trying to predict the next
price movements is not an easy job.
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Also, trading strategies are very hard to
be back tested by using a simple line chart.
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Another viable line chart strategy is trading
support and resistance
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As mentioned earlier, line charts have one
significant advantage and it is to filter
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the noise in the markets.
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By displaying only the closing price and ignoring
the price action between the opening and closing
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prices, a line chart reflects the true market
nature.
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Trends become more visible, turning points
easier to spot and the classic pattern recognition
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approach works best.
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Let’s consider support and resistance, for
instance.
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Support and resistance are practically the
foundation of technical analysis.
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The better traders understand that support
and resistance levels serve as a starting
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point for developing an idea of what may happen
next in what concerns the price movement.
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A support level is an area at which demand
(buying power) is strong enough to stop the
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price of an instrument from decreasing any
further.
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A resistance level is an area at which supply
(selling power) is strong enough to stop the
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price of an instrument from increasing any
higher.
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A new support level often will be found above
a previous trading range’s resistance level
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(and when a resistance level is broken, it
becomes an area of support)
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A new resistance level often will be found
below a previous trading range’s support
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level (when a support level is broken, it
becomes an area of resistance)
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With line charts, spotting support and resistance
levels is very easy.
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Let’s take a Dow Jones 1-min chart as an
example.
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This approach is pretty straightforward: you
identify relevant support and resistance levels,
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based on recent market swings and scalp these
areas for a few pips.
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The horizontal lines joining market swings
can be very subjective.
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In most cases, we can usually only approximate
those areas.
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The technique of drawing support and resistance
line is simple, we just have to identify recent
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and relevant market highs and lows and connect
the swings with a line.
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If the line includes 3 or more swing points,
it means that the support/resistance level
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is more relevant.
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Look at the chart above and see how powerful
this simple technique is.
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Some support and resistance levels are respected
to the pip.
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If the market breaks the support and resistance
areas, look for an entry in the direction
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of the breakout.
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The conservative way is to wait for a retest
of the support/resistance level and enter
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the market at the first sign of rejection
of the level.
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You can pinpoint the entry with other technical
indicators, depending on your preference –like
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the RSI, ADX,OBV, etc.
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If scalping isn’t your style, then line
charts are also a useful tool for swing trading.
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Let’s take a look at the H1 Dow Jones chart.
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We have almost 5 months of price action, during
which we recorded a strong rally to the upside,
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a huge market correction and a period of consolidation.
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Just look how accurate some support and resistance
levels are.
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Another way to trade with line charts is to
use them together with moving averages.
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All traders, regardless of experience, know
that moving averages provide resistance in
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bearish trends and support during rallies.
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Moreover, the rule of thumb says that the
higher the moving average, the stronger the
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support or resistance the price meets.
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Furthermore, the bigger the time frame, the
stronger support or resistance gets.
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One of the most relevant things to keep in
mind when trading with moving averages is
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that they reveal a trend’s strength.
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The more the price comes to the average, the
weaker the trend becomes.
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And, eventually, breaks it.
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So instead of using candlestick charts, try
using line charts and consider a relevant
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test only when the line chart touches the
moving average.
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Out of the three types of charts offered by
most trading platforms (bars, line, candlesticks),
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the line charts are the least likely to be
used by retail traders, let’s face it.
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But that’s only because traders are scared
of missing important information by looking
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only at the closing price of a period.
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What you need to consider is the fact that
the closing price will give you important
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information about the price action during
a trend.
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By avoiding the upper and lower shadows of
regular candlesticks, using line charts will
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get you closer to the real price action.
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I’m not saying you should ditch the candlestick
charts and trade only the line charts, but
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next time when you are in doubt and you don’t
know if a trade setup is valid or not, open
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a second window and take a look at the same
image, but on a line chart.
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It will save you a lot of losses in the long
run.
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If you got any value from this and learned
something new, don’t forget to subscribe,
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Until next time.
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