How to Draw Trend lines and Channels
Hello traders! Welcome to the Price Action Course and the second module “Keep It Simple Stupid: The KISS Approach.” In this lesson we are going to learn how to draw important levels to avoid the noise and how to correctly draw support and resistance areas.
Now the first thing we’re going to do is we’re going to define what the KISS approach is. And some people misunderstand the actual meaning of this trading. Well, it’s not a system but it’s more like a style. We use naked charge and we base our decisions only on price action. Now let’s start by actually defining what the KISS approach is.
Keep it simple stupid is an uncomplicated trading system based on levels that aim to catch big moves with the minimum risk possible and the way we do this is that we correctly assess where big buyers or sellers are going to be placed in the market and we wait for price to retrace to these areas and when price retrace to these areas, we look for confirmation and we enter a high probability trade with a very good risk-to-reward ratio because we are actually trading at inflictive zones that gives us a very narrow stop-loss levels.
Now, by doing this we actually increase the risk-to-reward ratio because we also do not use any indicators that might distract us from the actual move that might make us leave the trade early. Now, let’s say that because of it’s simplicity trading with these styles will give you better enters and exit. And this is true, we already said it. We wait for a corrective move to the zones that we are looking at and we trade from them. We are not trade chasers and we hate big stop-loses and we always look at a minimum risk. This means that by not having any indicators on your charge, you will be only focusing on extremely important levels. And if you take a long position at a support level, you are not going to take out your trade until you reach your target which will be basically the next resistance zone or the next important resistance zone.
Of course, when looking at your charge, you are going to look at intra-day resistance areas but these are meaningless to the KISS approach because we know that when buyers come into the market, the actual move is only going to retrace when we encounter actual sellers or big sellers.
This is key because once you enter a position, you will only manage it based on the level strong on your chart. And sometimes traders that utilize too many indicators will exit positions too soon because they read over-bought and over-sold conditions for example. And those are only small corrective moves. And this is what I was talking about. Let’s say that you go long at a support area that you correctly assessed price rejected and you have a great entry on a high-probability trade on a very high risk-to-rewards scenario but because you are using too many indicators you read that the market is now over-bought and you decide to close your trade 50 pips in.
KISS traders open high probability trades on very good risk-to-rewards scenarios because the actual exit points are already drawn. And this is what we’re talking about: we enter our position, we risk the minimum possible on the position and we aim to catch a big move, or at least hit our targets to the next important area. And the most important of all things is that we plan our trade and we trade our plan. Meaning that if we are planning to enter short at a very strong resistance zone and to take profits at the next support area, which is 250 pips below our entry, we are going to do that. We are not going to close our trade 50 pips in just because we have some profits. If we plan to take profits to 150 pips in, we are going to do so because that is the next support zone or the next important area where buyers might come in and lift price up.
What we’re going to do now is we’re going to watch a KISS example. And this is just a normal chart, I don’t know which currency pair we are looking at but you can see that if we start right here, you can see that we have a low and we can start drawing a support area, okay? Then right here, price makes some kind of a flag before continuing to the upside and you can see right here that we have an extremely important resistance zone. Because of the velocity of the move right here, you can actually assess that sellers are coming into the market because one, candlesticks are going shorter and shorter; and two, the move to the upside is diminishing in velocity. And then we have a spike high and a spike low meaning that even though buyers try to break through this area, they couldn’t and price went all the way back down here to test these highs.
We moved up and let’s say that we started trading right here, okay? We are looking for an opportunity. And the first thing we are going to do is we’re going to look for the next high of the move, so we are not going to trade this level. First of all, it is an important level but we need for a break of the market structure and the current structure is not structure, you can see that we have a higher high, higher low, higher high, higher low, higher high, higher low, et cetera. And right here if we go short at this resistance zone, we might actually get stumped out because the market structure has not shifted or has not been broken yet. And then we make this high and we re-test it. Okay?
When this structure brakes, we can trade this level. And by trading this level and trading this insanely big dip to this support area, you can now assess that. If price comes all the way up here, you can go short on a high-probability setup because of this extremely fast move down. You can see that price took one day to eliminate all the gains from one week. And you have to look at this too. You have to look for the velocity of price. Now, you can see that here we have another short opportunity, price breaks through this pivotal level, which is now a pivotal level because we broke to the upside and then to the downside, okay?
So, if you go short, you have to take a look at this level because price might balance from it and stay inside of a range. So you need a break below this level. When price breaks below this level, we have the next support zone and we are looking for a bounce and a re-test of this level to go short.
Remember that we always look for big buyers and big sellers. And right here we do have big sellers but we don’t have a re-test of this level just yet. And price drops to this lows right here and right here we can trade this level. Because we were waiting for a bounce of this support area and a short opportunity right here at this resistance zone, we don’t trade this move down. But when price hits this low, you can go long and trade this level because you can see that it took a very long time for price to re-test this level and then it broke to the downside but buyers actually came in and strongly pushed the price up to the areas that we are looking at right now.
Here when price touches this support zone, you have a very good opportunity on a high probability trade and the risk-to-rewards ratio is actually very good. I would say that it’s better than 1:2 if you’re looking to take some of your position at this pivotal level. Okay? And of course you have a second target at this resistance zone and when price hits this resistance zone, you can close your long position and flip it to go to the downside. And basically this is what we’re going to be learning and what we’re going to do and right now we’re going to go to the charts and we’re going to try and… well, I’m going to teach you how to correctly draw this level.
So, this is the Aussie-US dollar 60-minute chart or the hourly chart and as you can see right here, we do have a long position on the Aussie dollar, okay? And we have five lots riding on a long position of the Aussie dollar, and I’m going to explain to you what I did here, okay? Now, first of all, let me grab a rectangle and let me just draw this support zone. And the way you draw a support zone is you grab the low of the move, which is the end of the week and you go until the end of the base of the move, which is the body of the candle. And you can see the price actually tested this level, and then re-tested it again making a double bottom formation. And of course, I wasn’t in front of my charts when the price made the double-bottom so I could not trade it. And I was waiting for another opportunity to go long on this currency pair and the reason I was looking to go long is because the structure was broken. You can see that right here from this high to this high right here, we have a break of the down structure. Price was making lower highs and lower lows and then a double bottom and then a higher high and a break of the structure. So, I was waiting for an opportunity to go long and what I did here is I based my trading decision on support and resistance levels and I’m going to show you what I did.
I’m going to grab another rectangle and I’m just going to draw a rectangle right here. This is by no means the actual zone that I traded. I’m just putting the rectangle because I want to show you how I did it. What I did is I grabbed the high of the gap, which was also support right here and this high right here. And the reason I did this is because if you look closely, you can see that before the weekend gap, price tested this area as resistance and then it gaped up. Then it gaped right here at the highs of the swing and then closed again… well, it actually didn’t close the gap but it went down and before breaking this lows right here, it found support at this highs. So the actual level is the highs of this wave or this move up, and you can see that it found support here, again here, again here, then it broke to the downside, re-tested these levels and again, right here, it tested these levels before breaking to the upside. And the high part of the rectangle is because we have one high here, two highs here, three highs here. So, what I was waiting for is a move back down or a retrace back down to these areas to go long on the Aussie-US dollar and when price dipped to this zone right here, I went long and I got another dip into the same buying area before price started to move up. And what I want to tell you guys with this position is that I am looking very closely at these levels right here. You can see that we have a base at these lows and of course we have a swing high that touched the trend line that we just drew, okay? So we have a base of these lows and then a re-test of the same lows on these highs. Then price broke with these highs abruptly but if we thicken this up a little bit, you can see that it took one, two, three candles to erase one, two, three, four, five… around 30 candles worth of up move.
The actual move down was very strong and that was one of the reasons I was hesitant on taking this long position but because of the breakup of this enormous down structure, I wanted to go long on the Aussie-US dollar. And I’m actually waiting for a new high just because we’re making higher highs and higher lows and this is what I was talking about on the past lessons when you count waves, you don’t count every single dip, but you count the overall move up and the overall move down and right here we have a low, the first low, the first high, the second low, which is a higher low right here at my buying zone and I’m expecting for a higher high. If price actually comes back and breaks with my buying area, I’m going to analyze and I’m going to think about closing my long position because that would mean that the sellers were too strong for us to go higher. But this is basically what I’m going to teach you on this course and we are going to go into depth on live trades on how to get these very good setups on any currency pair.