Trading the Line in FOREX

I talk about "trading the line" and watching the "test/exceed" of a line often in the GoodmanWorks trading room. It is an extremely useful concept that, unfortunately, few traders use to maximum advantage.

In the context of the AUD/USD walkthrough, it would be used if the trader decided not to take the final one-half position off at the over.

Put simply: a line is the current swing component of a 1-2-3.

A line may be a component of a propagation swing. See Figure below. On the left, the Bounce 3 is the current line.

On the right, the Propagation 2 is the current line.

[caption id="attachment_13231" align="aligncenter" width="550"]The Line in a Propagation—Test/Exceed The Line in a Propagation—Test/Exceed[/caption]

Each component swing has a test (beginning point, or BP) and an exceed (end point, or EP). A point is an exceed to the first swing; a test to the next swing.

Again—The test of a line refers to its beginning point, or BP. The exceed of a line refers to its most current ending point, or EP.

Here you would be able to use the line to quickly see if anything important has happened to the PTS. If it has not moved out of the line by going past the test or the exceed—move on.

Tip: If you simply ID the current line and the test and exceed, you know everything you need to know about that chart until the test or exceed is broken. A line may be a component of a trending swing, or intra-swing 1-2-3s. See Figure below.

[caption id="attachment_13232" align="aligncenter" width="550"]Trading the Line Trading the Line[/caption]

Trading the line (TTL) refers to a trending market past the under take-profit; Line/Test/Exceed may refer to either a propagation swing or a trending swing, within context. If you decide to not take the over, simply move your S/L up to the nearest or—if they are close—the next-to-nearest line test. Do not forget to add the spread for the pair to the stop-loss.

Using 1-hour charts, I typically get one or two TTL trades a month. They are usually 300 pips to 400 pips, but 500 pips is not uncommon. I have taken as much as 700 pips trading the line past the over.

Three items concerning lines and intra-swing 1-2-3s:

  1. In the great scheme of things the line is a swing of some large matrix.
  2. The secondary swings tend to be much shorter than a propagated secondary swing—and they are only connected to the most previous swing in the opposite direction, unlike a propagation, which is, of course, connected to the previous 1-2-3.
  3. In trading the line, the SPS of a 1-2-3 becomes the FPS for the next FPS in succession as the trend develops.

When a market trades for a time between the test (T) and exceed (E) it is a time hash—at least at that time frame. Below, the price movement between the red line is a time hash relative to this time frame. At a smaller time frame, of course, there may be swings, matrixes, and even waves building. See Figure below.

[caption id="attachment_13233" align="aligncenter" width="550"]Time Hash Time Hash[/caption]

Following lines instead of bars has two applications for the trader:
  1. It allows you to follow more markets, as it only takes seconds to see if the current line test or exceed has changed.
  2. It keeps you from taking action when there is no reason to take action (time hash, news). Time hash is hypnotic and tends to make the trader rationalize and want to do something. Charlie used to say, "We'll do something even if it's wrong," and this is what he meant, I am certain.
Tip: Another big one here: Watch the lines, not the bars. If you watch the bars, the time hash will almost certainly encourage you to take and action which is unwarranted. Watching lines instead of bars also allows the trader to monitor more markets. If a line test or exceed has not been breached—there is nothing else to consider on that chart—move on to the next chart.

The basics of trading the line: If the exceed is broken, the swing in question is continuing and you have a new Test Exceed range. If the test is broken, the swing in question is complete and a new swing in the opposite direction is formed—with its own Test/Exceed. In between those is time hash. See Figure below.

[caption id="attachment_13235" align="aligncenter" width="550"]A Perfect Line A Perfect Line[/caption]

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2017. Content published with author's permission.

Posted in ...