After trading for over 30 years, and spending 5 years years as a futures broker, and now having been a forex coach for over 5 years, I've had the opportunity to see a lot of systems come and go. Mostly go.

I think that one of the common threads among systems is the misuse of indicators. Indicators can be a help in trading, however in my opinion and experience, they should NEVER be used on their own.

Indicators should only be used for confirmation about what you see happening based on price action. Price action is extremely important to understand because the best indicator in the world is … PRICE!

Price reflects all that is know in the immediate moment. It does not have an ego or any emotional baggage. It just is. When you fight price, you fight the entire market.

As an example, if you see that a stochastic indicator is in the "overbought" zone, you may be thinking that it's time to sell. The answer is, maybe. It depends on where price is at.

If you look at a chart, you'll see that price established natural levels of support or resistance. These are important levels to pay attention to. If stochastic is showing overbought, selling can be very dangerous if price has no "reason" to stop. In fact stochastic can stay overbought for a very long time, and if a trader sells because of the indicator alone, they will see their account melt very quickly.

One very simple way to measure support / resistance is through the use of trend lines. However one of the problems with drawing trend lines is that they can be quite subjective. If you give the same chart to 3 different traders and ask them to draw trend lines, you'll likely get 3 different results. So what can we look for to help us draw trend lines?

For starters, I would suggest that you always start from higher time frames. I like to start on weekly charts, and then go to the daily's. When looking for a down sloping trend line, try to find a line that contains at least 3 swing high touch points. The more touch points, the stronger that line tend to be.

When looking for an up sloping trend line, try to find a line that contains at least 3 swing low touch points, and again, the more touch points, the stronger that line tend to be.

Once you've identified these lines, you need to be patient and wait to see what happens to price once it gets to a trend line. For example, if price rallies up to a down sloping trend line, that line is either going to hold up the price action, or price will break above the line. If price holds, you should see a candle stick formation that is negative. So the strategy, for day trading at least, would be to look for intra day shorting opportunities. And of course if price breaks above the down sloping trend line, we would start to look for buying opportunities.

Of course the opposite would apply to a situation where drops into an up sloping trend line.

Now here's where indicators can help. Once a trend line tested, you can then go to indicators to see if they are confirming the price action. Remember, price action comes first! And if the indicators are confirming, then you may have a valid trading opportunity.

So once again, spend lots of time on the higher time frame charts and get good at drawing strong trend lines, and you'll find that they can be extremely helpful in setting up trading possibilities. In my latest weekly trade example (available for free by clicking on the link below), I show actual examples of how to draw trend lines.

All the best,

Vic Noble

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Source by Vic M Noble