Effective Trading Strategy using Line Charts - Crypto Academy / S6W1 - Homework Post for @dilchamo
Good day steemians, This is season 6 week 1 of the crypto academy and I'll be doing the task assigned by crypto professor @dilchamo
TASKS
Define Line charts in your own words and Identify the uses of Line charts.
How to Identify Support and Resistance levels using Line Charts (Demonstrate with screenshots)
Differentiate between line charts and Candlestick charts.( Demonstrate with screenshots)
Explain the other Suitable indicators that can be used with Line charts.(Demonstrate with screenshots)
Prove your Understanding of Bullish and Bearish Trading opportunities using Line charts. (Demonstrate with screenshots)
Investigate the Advantages and Disadvantages of Line charts according to your Knowledge.
Conclusion.
Image created in canva
1. Define Line charts in your own words and Identify the uses of Line charts.
Among all charts in trading, the line chart is the simplest form of chart which provides a visual pictorial representation of historical price by making use of a single continuous line. They're considered as basic and simple to understand because it only connects and presents the closing prices over a period of time thus making it easier to filter the noises in the market created by other chart types such as candlestick charts and also helps to determine the overall existing trend in the market.
The use of the line chart spans past providing a simplified view of the market, helping to filter out noises and determination of the general overall trend in the market. It also helps to determine basic support and resistance points and levels in the market accurately. It also proves to be very useful when dealing with shorter time intervals.
Image gotten from trading view
2. How to Identify Support and Resistance levels using Line Charts
As explained subsequently, one of the useful applications of the line charts is to accurately determine support and resistance levels with ease.
Support and resistance levels are areas on the chart where the current momentum of price gets halted and reverses. Price usually bounces off these zones.
A chart image identifying a support level using a line chart is given below.
Image gotten from trading view
In the chart image above, we observe how chart reacts to the zone drawn with the help of the line chart. Price bounced off and retraced to the downside upon contact with the zone and this is easily identifiable with the help of the line chart.
Another example identifying resistance level is given below:
image gotten from trading view
Here, the opposite of the earlier situation plays out. Price became bullish for a while and encountered difficulty in breaking above a particular level and this occurred - in this market. With the aid of the line tool, its easier to spot these playouts and identify the resistance level existent in this scenario.
3. Differentiate between line charts and Candlestick charts.
In differentiating between line charts and candlestick charts, i'd first place a pictorial image for comparison between the two.
Line chart image gotten from trading view
candlestick chart image gotten from trading view
From the images above, observable differences are already imminent.
The line chart is composed of a single continuous line and only takes into recognition the closing points of intervals whereas the candlestick is a kind of price chart that takes a bar shape, it displays the open, low, close, and high of a session and represents each market movement with varying colors by default i.e a bullish session is represented with a green candlestick and a bearish session is represented with a red candlestick.
From this, it's obvious that the candlestick disseminates more information than that of the line chart and for this reason is more complex to understand when compared to the line chart. Due to the little information communicated, the line chart is far easier to use especially for beginners when trading.
Line chart is relatively useful in filtering out noises generated in the market and is particularly useful for higher timeframe analysis where a trader only needs to get the overall direction of the market while the candlestick chart helps in generating information about momentum and volatility in the market through the structure of candlesticks and wicks.
The candlestick chart when compared with the line chart helps provide a trade with the necessary information for analysis.
4. Explain the other Suitable indicators that can be used with Line charts.
The line chart can be paired with a couple of other indicators to ensure more accuracy in trading the markets and some strategies can also be employed. One of which is the line chart paired with the Bollinger bands plus the Relative Strength Index (RSI).
The bollinger bands is a useful indicator which helps in determining volatility in the market and helps to give trade entries, by combining the bollinger bands with the RSI indicator which helps to identify overbought and oversold signals in the market, we can not only take reversal trades in the market but we can also refine and confirm trade signals given off by the bollinger bands.
The indicators would be combined to form a strategy and here extreme conditions in the market would be identified. Situations when the line chart moves above or below the bollinger bands counts as extreme conditions and trades would only be taken when the RSI indicator confirms the signals given off.
For example in the ETH/USDT chart pair below, the line chart moved above the upper band of the bollinger bands and an overbought condition was given off by the RSI indicator indicating that a reversal to the downside was imminent and thereby confirming the move. A sell signal was opened at this point to take advantage of the signal.
Image gotten from trading view
Similarly, the line chart moved under the lower band of the bollinger bands and an oversold condition was given off by the RSI indicator indicating that a reversal to the upside was about to occur. A buy signal was open to also capitalize on the signal.
From the chart, we observe that implementing the line chart with the RSI indicator and bollinger bands would make a suitable combination and would help to increase the accuracy of trades taken in the market.
5. Prove your Understanding of Bullish and Bearish Trading opportunities using Line charts.
The line charts can be used to spot and place trades with respect to the current trend in the market. A market is said to be trending if its either in a bullish or bearish market condition and the identification of these trends are very important when finding trade opportunities in the market as traders are expected to trade with the existing trend (the trend is your friend). The line chart helps to easily identify the existing trend based on the direction of the continuous lines it presents.
In a bullish condition, when making use of the line chart, major levels in the chart such as the support and resistance levels should be identified
Image gotten from trading view
In the ETH/USDT chart pair above on a timeframe of one hour, the existent structure in the market is an uptrend structure and the recent resistance zone which price has reacted to multiple times has been identified. A trend line has also been drawn to show the general uptrend situation of the market and a break-retest-break strategy has been implemented to determine a trade in the uptrend.
For this strategy, we wait until price breaks the resistance zone from below and create a swing high before going back to retest the broken resistance zone. For this strategy to be successful, price must rebound upon retesting the resistance zone for the second time and break above the recent swing high created. Once this condition is fulfilled, a buy entry would be placed at the break of the swing high with risk management measures fully employed.
Similarly to identify a bearish signal, major levels where price could potentially react to would be identified.
Image gotten from trading view
In the SOLUSDT chart pair above on a timeframe of one hour, the market was first in an uptrend structure until signs of weakness showed up leading to price attaining a buying climax (bclx), at this point the momentum in the market is greatly reduced and price sprialled into a downtrend. Using the break-restest-break strategy previously employed in the uptrend market scenario, we first identify the support level in the market and wait for a break of structure.
We observe price broke the support level from above and created a swing high before going back for a retest of the broken support zone. After price retested the zone, we wait until it rebounds and breaks below the swing low point identified. Once this condition is fulfilled, a sell entry would be placed at the break of the swing low with risk management measures fully employed.
6. Investigate the Advantages and Disadvantages of Line charts according to your Knowledge.
The advantages of line charts include
- Eliminates noise in the market
- It gives a clearer overview of the overall trend and market structure
- Easier to understand in the case of beginner traders
- It allows one correctly identify support and resistance levels
The disadvantages of line charts include:
- Doesn't give sufficient information for analysis such as the low, open, high, and close of a session.
- It can't be accurately used for trades in isolation.
- Inability to accurately determine order blocks on the market and zones where momentum and volatility declines.
- Depicts small changes which are difficult to accurately measure
7. Conclusion
The line chart offers a simplified approach to the markets and offers ease to not only beginner traders but advanced traders as well. The crypto professor has done an excellent job of explaining the use and application of the line chart in a simple way. Thanks to the steemit team for the crypto academy, It's done far much in helping me tackle the markets one indicator/strategy at a time.