A Lazy Journey To Profitability Using Line Charts

If you’re someone who also struggled from trading the candlesticks and found no “holy grail” with what you’re doing, then this line chart guide is for you.

If you do a quick search in YouTube about candlestick charting, you’ll observe that over the years the views that it has accumulated has reached millions.

However, what we don’t realize that there is actually another chart view that most traders don’t normally use and you may or may not have noticed, these are mostly used in news channels such as CNBC, Bloomberg and these are line charts.

These are basically charts that only record closing prices of any financial instrument that you’re trading whether it’s stocks, forex, commodities, or cryptocurrencies and it’s also considered to be the view that doesn’t generate much noise.

 

Spotting Support And Resistances Made Even Easier

Before we dive into reading these lines, you must know what supports and resistances are because they are the foundations of technical analysis.

      • Support – price levels where people will most likely buy.
      • Resistance – price level where people will most likely sell.

 

Both supports and resistances can be broken depending on the market’s sentiment. Here are some more examples for you to get accustomed on what levels you should look out for.

Try to spot on your own what other levels can be used as supports and resistances. We encourage you to use TradingView for this simple exercise.

By now you might be wondering how can you spot and ride potential trends in the market without bombarding your charts with whatever tools that you might find.

We have found these indicators that should be enough to help with your trading decisions and even if you add all of these mentioned indicators, your view will still have that clean look so it’s less likely that you will have that case of “analysis paralysis”.

 

Indicators That Go Well With Lines

Parabolic SAR (Stop And Reverse)

This indicator is a must especially if you intend to fully immerse yourself in lines. Remember spotting supports and resistances? The Parabolic SAR (PSAR) can also benefit you in searching for these levels.

GE Example 1
General Electric, Co. ($GE) Line Chart

 

And here’s another reason why we don’t often look at candlesticks anymore because there’s so much going on that we are also risking ourselves of getting frozen in our own analysis.

Let’s switch the line chart for General Electric, Co. ($GE) to candlesticks so you can see for yourself.

GE Example 2
General Electric, Co. ($GE) Candlestick Chart

 

Another benefit of using the PSAR is that can also serve as a good alternative indicator for trend following strategies instead of placing the usual 20/50/100 Moving Averages that you would see in trading textbooks.

Apple Inc. ($AAPL) Daily Chart

 

However, a common problem that you might face when using the Parabolic SAR is that it could generate false signals for sideways markets or even trending markets which you might have figured out in our previous Apple Inc. ($AAPL) chart example.

Apple Inc. ($AAPL) – Assume that you bought on November 15, 2016

 

Since we’ve seen that the PSAR has a risk to stop you out in an ongoing trend, here’s another indicator that you can use to cross check if a chart’s trend is still intact.

200-period Moving Average

The 200-period serves as a baseline for looking at charts that have potential long-term trends. Since we mentioned earlier that the Parabolic SAR has a tendency to give out false reversal signals, this indicator will give you the “ultimate decision” when it’s really time to exit the trade.

If we go back to the previous Apple Inc. ($AAPL) chart example, it will look like this.

 

Apple Inc. ($AAPL) with an EMA 200 (green line)

 

As observed in the $AAPL chart example, the price is still above it’s 200-period moving average. So you have the option to continue and ride the trend until it goes below the moving average or once the PSAR shows a clearer signal of a trend change.

But what most people don’t know is that the 200-period moving average is so flexible that even if you switch to lower timeframes, you can backtest and discover other strategies and figure out how long they can materialize.

Time frame (w/ SMA/EMA 200) Estimated Holding Time
Daily Weeks to Months (or Years)
Hourly Days to Weeks | Weeks To Months
15-minutes | 5-minutes Minutes to Hours | Hours to Days
Roku Inc. ($ROKU) 15-minute chart | These two backtests materialized in 24 hours or less

 

Looking at this $ROKU chart you can create a simple strategy such as entering when a PSAR has signaled uptrend and exit once the price hits the EMA 200 resistance (6.26%).

Another trade idea that you can come up with is buying above the EMA 200 and selling near your chosen PSAR resistance which can reach up to 10.80%.

You can check out this comprehensive guide to further understand why this indicator is probably the only trend following tool that you’ll need in trading the markets aside from the PSAR.

Volume

Since lines alone cannot tell us if a certain stock is being actively traded, we may want to add the volume indicator to our chart view.

This way, we have an idea on how volatile our stock is going to be and we can have further have confidence in trading the stock if we also know any news that came along with the movement.

There are many ways to interpret volume but we can give you some common scenarios and case studies on when it’s actually useful to take a look at volume whenever you’re trading.

 

Use The News And Time It To Your Advantage

While some would argue that reading and understanding news doesn’t help in trading the markets, it’s actually pretty powerful if you manage to connect the dots.

When the company reports good news and you observe that there’s a volume spike it’s usually an entry signal and you can just simply look for the nearest resistance if you want to sell right away.

However, the opposite can also happen if a company reports bad earnings reports such as this scenario when Netflix reported their Q3 earnings for 2020.

 

$NFLX Q3 earnings reported negative resulting in a drop in share price

 

Here’s another example with Spotify wherein a medium term rally happened when Joe Rogan got his podcast onboard the streaming platform through an exclusive deal reported last May 2020.

Additionally, another brief euphoric rally was also spotted on December 2020 because his podcast became the most popular on the platform. Observe how the markets react whenever news pops out.

 

Spotify ($SPOT) Hourly Chart

 

Another example of using news to your advantage is anticipating the move. This is the advantage of technical analysis.

In the case of the crypto markets, there was this report called the Dogecoin TikTok Challenge that circulated last July 2020 but before news broke out, the technical indicators already signaled that you can buy Dogecoin and you could’ve made a quick buck if you managed to spot this.

 

Dogecoin last July 7, 2020 went over 100% in under 24 hours amid the viral TikTok challenge

 

We hope you learned a thing or two from interpreting the line charts. If you want to delve deeper to how we usually think whenever we trade regardless on what chart views you’re using, feel free to read our Trinity Philosophies.

 

 

Featured Photo by Chris Liverani on Unsplash