A diagonal trend line is thing of beauty in your trading arsenal. It tells you when to get in or out and what to expect. But sometimes we need confirmation in order to make a decision. An additional clue is okay...show me a cop who determines all his cases on a single clue and I will show you a cop with a very short career.
Therefore we need backup to confirm we are not crazy or seeing things. We never want to buy (go long) at the top of a move/trend, even if it is a small move seen in the lower time frames (5 min, 15 min, 1 hour).
What it Takes to be a GOOD Trader
I want you to get this in your mind right now...you base all of your trades off of the DAILY time frame. Where the DAILY chart is going, that is where you are trading. If it is heading down, trending down, then all of your trades should be going short. What do I mean? This is gonna get complicated so look at the charts and open your mind. We fail in trading because we see things incorrectly. Why is that? Look at the following chart...
Your baby sister can look at this picture and tell you "it's going down" right? You can draw diagonal trend lines that will clearly indicate that price is going down but you are no longer stupid are you?
Price keeps bouncing back up before it falls even further, and those bounces are big money to the smart trader. So how do we make the best of this opportunity? How about some more visuals?
This one will be using a DAILY chart again but we are gonna add a diagonal trend line and I will ZOOM in a bit...
On this next chart I will be using aggressive anchor points, you can be as conservative as you like, but you are not reading this to be conservative. You will see that price broke through my trend line and I had I been short I would have exited. But we are looking at this next chart for the purpose of going long, wanting to capitalize on the price bouncing back up.
Here it is zoomed out...
So we can see that price has possibly halted going down even further and could possibly be ready to do a pullback and go up. How do we know this? Is there a way we can confirm it? Yes but remember, do NOT make trades based on what you are about to see. This only gives you a "heads up" that price is about to reverse...probably...and you need to do this using the DAILY chart and always draw your trend lines. So what is it?
This oscillator is called Stochastics. Stochastics should be used on the DAILY time frame to allow you to determine near future price reversals. Always use the default settings of 14,3,3 (but use close/close settings) When you place this on your chart you will need to use your trend lines, and use them aggressively...and do NOT use more indicators.
See if you see things more clearly now...
You see it don't you teddy bear boy? Remember, this is NOT the end all, be all...it just gives you an idea of what is going on. Price may continue to drop even further or it may/probably will go UP very soon as the Stochastics is at the bottom (which means it is in an overbought environment).
Now you need to do 2 more things:
1. Be ready to go long or BUY
2. draw an aggressive diagonal trend line so let's do that (and now I will zoom in on the existing chart and then drop down to the 1 hour chart for more details)
DAILY chart...
One hour chart...and I took the Stochastics off so you don't get confused...
Now let's put this all together for WHEN you should go long, anticipating price to go up. Remember, price could go down so we do NOT jump in just because our Stochastics tells is price is overbought.
Because this trade will be trading against the overall trend, you should NOT go long (buy) until a candle CLOSES above the black diagonal trend line and the grayed out horizontal line...then you would enter at the opening of the next candle. This would be a double confirmation.
You guys got this? Okay because I am DONE.
Use the Stochastics only as a heads up NOT as a reason to be in a trade. It only tells you that something MAY be coming...it is not reliable for using solely on its own.
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