How To Trade Price Action Using Line Charts (Old School Trading Systems)
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How To Trade Price Action Using Line Charts (Old School Trading Systems)

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

About James Carlton

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23 thoughts on “How To Trade Price Action Using Line Charts (Old School Trading Systems)

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