How to Draw Levels, Trend Lines and Channels


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Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course on the first module, Technical Analysis 101. On this lesson, you will learn how to use and draw levels, trend lines and channels. We’re going to jump right into the N.T.4. platform because there’s no better way to show you these than actually doing it.

Okay, traders, we are back. Here, we have the G.B.P./U.S.D. daily chart and the first thing we need to go through is what levels are we going to be using. There are a lot of technical analysts out there that will tell you that you need to draw every single one of these quarter resistance levels on your charts. I’m here to tell you that this is wrong. You only need to draw the important levels on the daily and four-hour chart, because if you start drawing every single level from the 4-hour chart to the 15-minute chart, you will end up with a lot of lines on your chart and you will be unable to take a profitable trade and to let your profitable trade run.
I’m going to guide you step by step on what to do when you are in front of a naked chart just like this one. Remember here, we are just going to learn how to draw them and use them.

The first thing you need to do is go to the daily chart and look for the first high if you are in an uptrend or the first low if you are in a downtrend. Why are we looking for the first high and the first low? Because remember that in an uptrend, the supply areas get taken out, and in a downtrend, the demand areas get taken out. So we are going to draw levels that might get taken out and levels that might hold.

Here, we are in an uptrend. You can see here that this area right here is being tested very strongly. You can see that, here, we have a long, wicked candle that goes all the way up here. That’s a huge week, a 77 pip week. This means that this candle opened right here, price moved about 94 pips to the upside and then closed just 16 pips from the opening price. This gives us rejection, guys. You can correctly assess that here we have a strong resistance area, so you’re going to grab your horizontal line two and you’re going to draw a horizontal line right at the body of the candle.

We are going to use the bodies of the candles for our horizontal lines because the rejection or the week highs really don’t matter to us in support and resistance. They do matter once you take the trade because we are going to use them, the highs and the lows, as our stop loss levels but we are going to go through that on another lesson.

If we continue with price action, you can see that we do have some support and resistance levels but they are very mild because they get taken out very quickly. This is what I’m talking about, guys. You need overall levels. You need big levels. You need levels that have been tested countless times and levels that were tested at support and now being tested at resistance. This is not the case. You can see that we went all the way up here and this candle closed above our level of resistance but did not take this high. Just after this candle, we have a huge 140 pip candle to the downside. This is what we call a fake out.

Like here, right here, we have a long, wicked candle, 166 pip with a very small body that signals rejection. Right now, we are using this level of resistance as a trading level because we can short this currency pair with it.

Now we are not only going to use support and resistance levels to short. We are going to use trend lines. Because right now we are in an uptrend, we are going to go from this low to this low right here. Now this is how you draw a trend line. You can certainly draw… Let me figure this out for you guys because we are going to be looking on this very closely. We can certainly draw these trend lines from this week low through these weeks right here. As you can see, this trend line got taken out before moving up. This trend line is not valid anymore.

You need to focus on valid trend lines. Trend lines that have not been taken out just yet. Here, you can see that we have one, two, three, four weeks, five weeks with this 160 pip candle to the downside and this is a huge candle. You can see that the bearish pressure after this rejection is enormous. The candle did not break with the ascending trend line. Shorting at the end of this candle would be a terribly idea. Why? Because we are in ascending resistance. Remember that trend lines are just not lines that you draw on your chart, but they are ascending resistance and support.

What you need to wait is for a breakout, a retest of this ascending support as resistance. Right here when we test it, we have an entry to short the G.B.P/U.S.D.

Trading with Trend Lines

This is basically how you use levels and trend lines to trade currency pairs. Of course you can use these methods… You can use these on any asset and you will use it on any asset that you are monitoring or that you want to trade. This is just basic support resistance and breakout strategy. When we have breakout, we have momentum, in this case, to the downside.

If you want to move things further you can see that we were actually in an ascending channel. You can clearly see that from this low, we retested these… What I did here, guys, is I just grabbed this trend line and made a parallel line to make it an ascending channel from this low. You can see that we clearly rejected it, tested it, which is now the top of the channel. Before coming up and before rejecting this area of resistance, the top of the channel and finally the breakout, the retest and the flush.

This trade would have yield at least 400 pips if you know how to hold onto your winners. Of course if you are one of these guys or if you listen to one of these analysts that draw support and resistance levels anywhere, you might just have gotten out 100 pips out of the move.

This is another thing. Here, you have to make sure to draw these level off support. Why this level of support? Because it’s the previous low that we made before rejecting this high. We can certainly assess that this is a range. The range is big enough to play this rejection, this breakout. As you can see here, when price comes all the way down to this resistance area at 5840, we have some Indecision Candles.

This is great because indecision candles not always mean that price is going to reverse. Sometimes Indecision Candles mean that price is going to continue, but we need a consolidation period, which is what is happening right now before moving lower or continuing with the flush in this case.

An idea here would have been to short right here at the retest of this ascending support as resistance and then take half of the position with 290 pip win. Move your stops here above this area of immediate support and let the rest run.

This is basically how you trade off levels. You just have to make sure to use the correct levels because if you were using these levels, for instance, as your first target, that would have been horrendous because this is not an actual level of… Well, it is a level of support but it’s not a strong level like the ones that I showed you. This is just the test back before the retracement and you see clearly that the first candle crosses below this low and we make new lows. The actual first target would have been here at this low and let the rest run. If you are okay with holding, you could have yield another 700 pips. Most of you guys would have been okay with a 290 pip win and I don’t blame you, because not too many traders can hold
trades for a week for a 300 pip win.

Basically this is how you use it. You just have to test and rinse and repeat and just draw your overall levels, your trend lines and trade breakouts with momentum.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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