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Today with the advances in technology traders have developed highly complicated trading methods, with sophisticated graphs. Let me tell you something: the best methods used by successful traders are quite simple. A simple method is easier to understand and easier to implement.
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.
Trading Line Charts – Interpretation
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 security/ stock.
Charles Dow, the developer of Dow Theory (the groundwork for technical analysis), was only interested in the close of the instrument, as the close determines each day’s unrealized profit or loss. 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.
How To Trade Line Charts – Signals and Trading Strategies
Line Charts Trendlines Breakouts Trading Strategy
Trend lines are straight lines drawn on a graph connecting support/resistance 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.
Drawing trend lines is 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. But should we use the low of the candles? Or the close of the candles?
With line charts, drawing a trendline is an easy task.
Line charts allow traders to clearly identify key support and resistance levels, trends and even chart patterns. As we can see in the Bitcoin graph above, the line chart makes it easy to spot major support and resistance levels.
Line Charts 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.
In the Bitcoin chart above, we can clearly see:
• two 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
However, a line chart should not be used by itself, as it does not provide enough price information and other complementing oscillators must be added. Also, trading strategies are very hard to be backtested by using a simple line chart.
Line Chart Trading Strategy – Support And Resistance 1-Min Scalping
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 (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 an easy task. The correct interpretation of those levels is not useful only for swing traders, but they are also excellent starting points for scalpers.
Let’s take a Dow Jones 1-min chart as an example.
This approach is pretty straightforward: we must 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. And keep in mind that despite the fact we are trading on the 1-min time frame, we zoomed the chart to the maximum level, and we have at least 2 trading days.
We can adopt several approaches when scalping the 1-min line chart:
- Identify support and resistance areas with at least 3 relevant swings and enter the market at the first sign of rejection of the area. Keep your stop-loss orders tight and aim for at least 2:1 risk reward ratio.
- 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 – Stochastic oscillator, CCI, OBV, StochRSI 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 during which the price retraced 100% and a period of consolidation. Just look how accurate some support and resistance levels are. I can tell you one thing: on a bar chart or a candlestick chart we wouldn’t be able to spot those levels.
Line Charts – Pros And Cons
• ↑ easy to understand
• ↑ good at reducing at reducing market noise
• ↑ offer a good for visualization of the overall trend
• ↑ good at identifying support/resistance levels and chart patterns
• ↓ do not provide enough price information
• ↓ generate a lot of false signals on lower time frames if used incorrectly.
