Even if you have only been casually following the markets for some time, you’ve undoubtedly noticed the variety of static lines strewn along the charts of many traders. This is a key way we impose our very human ideas of market behavior onto a rather inhuman seeming representation of the world that supports us. The lines help our minds form a reliable frame-of-reference for our idea of the general short-term and long-term trends appearing, persisting & disappearing in a market.
Price levels guide us into marking out the static price structures that appear on the chart. They serve as a point-of-reference for us to try understand current price action as it develops live.
THE ROLE OF LEVELS ON MARKET BEHAVIOUR
Levels are so widely used that they are a part of the decision models that people use in their trading systems.
And thus they influence the market in 4 distinct ways, They:
- Stop Price
- Attract price
- Repel price
- Nothing at all ( useless )
These behaviours always occur, keep your attention on no. 4 especially as it will remind you that the lines are only mental constructs and are thus liable to be disobeyed entirely by the markets.
Finding & Using Pivots
Line-drawing tutorials are abundant on the internet. I want to focus on the reasoning behind trendlines therefore, we will approach them through the lens of pivot high & lows.
Pivots can be found using the naked eye, however they are also built into most platforms, therefore I will not dwell on methods.
These pivots are simply: a high point in data preceded and followed by lower highs. The same for pivot lows. They are always more clear in retrospect as it is not possible to truly define one until price has completed the structure, something they share with other wave-based indicators.
Use pivots as a tool to build an awareness within yourself of market structure and it’s nature. They will ultimately become an unconscious consideration that makes your trendlines better.
VIDEOS ( Using Trading View )
- To start any trendline first connect two peak highs.
Whether you draw from the body or the wick, always be consistent.
2. Do not delete lines which have been broken through by newer pivots.
Make them less visible, there is a chance they will remain relevant.
3. Volatility and market behaviour is most important
The constant changes in market nature should be factored into your system before relying on trendlines to help.
You might come to find that sometimes irregular trendlines are need to properly define the current structures.
Market structures are the lines in the sand. Price action is the motions of the finger drawing in it.Adam H Grimes