Updated: Mar 13, 2019
Drawing lines done right. Analysis done well.
When I was starting, I ignored the importance of drawing lines in Technical Analysis thinking Price Action and Indicators are enough. It didn’t matter because I was scalping in the 15-minute chart. Wanting a work-life balance pushed me to incorporate lines in my analysis. From then, I can see projections in which I can hold positions longer without having to checking them every time.
Upon looking at a chart, I didn’t know where to look at, what to find, and how to make sense of it. I learned that you have to slice the chart and take only the recent significant part. How?
1. Zoom Out
At the very least, go to D1 or Daily chart and zoom out thrice. Like pizza, you have to have a good view of the pie to be able to slice it nicely. Also, higher time frames such as D1 has clearer more solid behavior backing up better projections.
2. Draw Lines where the Recent Price is
So that your analysis is updated and will make sense when you decide what order to take. Consider viewing a chart through Line Graph. And put lines on edges.
Otherwise, when you’re viewing through Bar Graph or Candlestick Graph, put where the lines are pierced through at least twice.
3. Use Horizontal Lines
(Support and Resistance)
These are not strictly lines. Think more like a zone or area where prices are likely to bounce from them. Support is the zone located below historical price data. From its name, it supports the prices from falling further. It tries to make the prices afloat and stay above it. On the other hand, Resistance is a zone located above historical price data. It then resists or rejects prices from shooting up. As a result, the prices are likely restricted making them stay below it.
In the example photo above, the middle horizontal line is neither identified as support or resistance. Nonetheless, it’s an area where price is testing whether it would bounce (line acting as Support) or break through (line may soon act as Resistance).
4. Use Diagonal Lines
(Trendlines: Uptrend and Downtrend)
Also, not strictly lines. You may treat them as support and resistance as well. It’s just that, they are inclined. Uptrend is an ascending step/stairs-like pattern consisting of Higher Lows and Higher Highs.
While Downtrend is a descending step pattern consisting of Lower Highs and Lower Lows. Prices also mostly bounce off upon approaching trendlines.
5. Plan Your Trade
After slicing the chart, you must now “cook it to perfection”. You may now zoom in and see if the price is approaching critical zones (horizontal, diagonal). Then, wait for a few days for SPA (Strong Price Action) signal to turn up letting you know that the market is ripe and ready for eating… err, trading.
Example of Winning BUY. First, price approached SUPPORT Zone, it bounced up as confirmed by the "pin bar" Price Action.
The second time price tested The Zone, it seemed thinking if it will break through or bounce again. It was undecided for a few days, as the given Price Actions were "inside bar" and "doji bar". Yet again, the "pin bar" Price Action turned up signaling that it's most probably going up. And so, it did!
Example of Winning SELL. Every time the price approached RESISTANCE Zone, it got rejected forcing it to go back down. On the second test approach to The Zone with backing up of the Downtrend line, the price went down without a doubt until SUPPORT. And by then, traders already made Profit.
I feel the need to follow this up with Price Action post. So that you’d know what to wait for, what it would mean for the trade, and what most probable winning position to take after drawing all those lines. I've already mentioned some in here and will go in-depth.
Happy trading everyone!
@marilesaca || Trading Kitten :3
Please Sign-in for comments, discussions, and exclusives!