Hey everyone, I am very happy to be a part of this season's Steemit Crypto Academy, and it is a honour to be part of @dilchamo on Effective Trading Strategy using Line Charts. Without any further ado, I will begin with the assignment for the lecture.
Line Chart
To explain Line Chart, I will have to explain trading chart. Trading chart are graphical representation of the price action for commodities, stocks, forex, or instrument on a chart. There are several chart types and these charts include Candlestick Line Chart, Bar chart, Heikin Ashi, Renko, Area, Baseline and so on.
In this post, I will be explaining Line chart since this is the major purpose of the lecture. Line chart is a continuous line drawn on the price chart connecting the data points of a chart. It connects the closing price of a commodity at a particular timeframe. Line charts are continuous upwards, downwards and towards the right.
The connection of the line chart make it easy for traders to read, analyse and interpret, compared to charts like the Renko Chart, bar chart and so on.
Uses of Line Chart
Interpreting market price: Since line chart is a continuous line used to interpret market price not including the complexity of looking at the open price, high or low, instead just creating a chart with line connecting the closing price of the market. This makes it very easy to interpret.
Line chart is used to filter the market noise when analysing a chart
It can be used to identify trends in a market, either uptrend, sideways, or downtrends easily.
The simplicity of the line chart allows for easy identification of chart patterns, support and resistance level, as well as supply and demand.
Identifying Support and Resistance levels using Line Charts
As a trader, identifying support and resistance is a fundamental with trading. A support is referred to as a point in the chart where a downtrend pauses for a while due to a reduction in selling pressure before continuing downwards or reversing, while resistance in trading is referred to a point where an uptrend has a pause due to a reduction in buying power before continuing upwards or reversing.
With candlesticks, identifying support and resistance can be a little complex as the candles do not always stay on the same line and in some cases, there are wicks which makes it difficult to interpret, but with line charts which do not have anything to do with wicks or irregular closing prices not aligning, it is very easy to identify both major and minor support and resistance in a market chart.
On the line charts, support regions are points where the line forms a pause while the line is heading downwards before reversing.
Resistance level is a level where the demand on the price action is paused as a result of sell off hereby causing the trend to slow down for a little, then retraces or reverses as a result of price rejection before continuing the trend or reversing completely.
Differentiating between line charts and Candlestick charts.
In simple words, Line charts are charts represented in charts, bearing one type of colour, compared to the candlestick chart with two colours showing buy and sell. Line charts are drawn based on closing prices and the lines are attached to one another. Line charts help to filter the noise in the chart, thereby allowing traders to read the chart with ease.
The Japanese candlestick chart is a chart that has its price action represented in candles. These candles show information such as the opening price, closing price, the highest price and the lowest price of the asset in a timeframe. Candlestick helps to differentiate between buyers and seller in the market, thereby allowing us to know when there is a bull or a bear via its colour difference.
If I were to be sincere, candlestick chart and line chart have their advantages, with candlestick charts, it is very easy to determine when the bulls (buyers) and bears (Sellers) are in control of the market but while the candlestick is very good, it can be difficult for beginners to comprehend.
Line Chart on the other hand is very easy to understand, and therefore allowing beginner traders to easily interpret the chart and to easily identify a trend or a reversal.
Suitable indicators that can be used with Line charts
Moving Average
No matter the type of chart, there are so many indicators that can be combined with them to confirm a trade, and in this post, I will be combining the Moving average indicator with the line chart. The Moving Average [MA] is a trend indicator which can be found in the chart (meaning it is not an oscillating indicator). Moving averages are line drawn in the chart to determine the trend of the price chart. Compared to the candlestick chart, the line chart is more suitable for MA as it will help to identify when a chart is about to trend upwards or downwards.
To identify, an uptrend, the price will cross the Moving Average going upward, while to identify a downtrend the price crosses the Moving Average downwards.
It can also be used to identify the support and resistance in the chart. At this point, the Moving Average will touch the point of major resistance or support. When it touches the pullback at the top, it identifies a resistance, and when it touches a pullback at the down, it confirms support.
Divergence Indicator
The divergence indicator helps to identify when the price chart will be having a pullback or reversal due to divergence. Divergence is defined as the point where the price of the asset is moving in an opposite direction to the indicator. Divergence are usually found in Oscillators such as RSI, Momentum Indicator and so on but for easier visibility, there is the divergence indicator which helps to identify a divergence in the market with ease. A divergence typically lead to the price changing its previous direction.
A bearish divergence happens in an uptrend and it is when the price is having a higher high while the indicator is having a lower high. This leads to the changing of the price direction.
A bullish divergence occur in a downtrend when there is a lower low in the price of the asset while the divergence indicator is having a higher low. This leads to a change in direction of the price.
My Understanding of Bullish and Bearish Trading opportunities using Line charts
Bullish Trading Opportunity
"The trend is your friend", this is one very popular quote for traders, proving that one cannot trade against the trend of a market as trading against the market will lead to a loss. In other to trade successfully, it is important to understand the market movement and then trade the direction of the market.
In other to trade the direction of the market, then the trader needs to trade the trend. To do this using the Moving Average Indicator, the price has to be above the move average. The breaking above of price from the moving average indicates a bullish trade opportunity
From the screenshot above representing SOL/USDT, The market becomes a bullish market when the price crosses above the Moving Average (MA).
Bearish Opportunity
In other to identify a bearish opportunity on a line chart, Moving Average Indicator will be used. To confirm a bearish trend, the price will fall below the moving average. At the point, the bearish opportunity has been signaled and through the bearish period, the MA will be above the price action.
The chart above gives an illustration of a downward movement/downtrend of SOL/USDT. The Price has fallen beneath the Moving Average.
Advantages and Disadvantages of Line Chart
Ease of reading and Analyzing
It filters noise from the chart.
Unlike the candletick which isn't smooth, the line chart is smooth
It allows for the ease of finding support and resistant
Line chart is scanty with little information abut the price action such as opening price, Highest value, lowest value, etc.
Line chart is traded by only long-term traders and cannot be used to trade on a short term.
Conclusion
It is completely wrong to commence trading without properly looking at the price chart. Line chart, is easy to interpret and removes noise in the market. I have seen a lot of traders just pick up trades without understanding the scope of trading, this is very wrong.
I am really glad to be a part of this class, I hope to participate in future classes. Finally, I must commend the effort of the professor in creating this content.