Support and Resistance, Trend Line and Channels
Support and Resistance
Support and resistance is one of the most widely used concepts in
trading. Strangely enough, everyone seems to have their own idea on how
you should measure support and resistance.
Let’s just take a look at the basics first.
Look at the diagram above. As you can see, this zigzag pattern is
making its way up (bull market). When the market moves up and then pulls
back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it
started back is now support. In this way resistance and support are
continually formed as the market oscillates over time. The reverse of
course is true of the downtrend.
There are two interesting points to remember:
- When the market passes through resistance, that resistance now
becomes support.
- The more often price tests a level of resistance or support
without breaking it the stronger the area of resistance or support
is.
Trend Lines
Trend lines are probably the most common form of technical analysis
used today. They are probably one of the most underutilized as well.
If drawn correctly, they can be as accurate as any other method.
Unfortunately, most traders don’t draw them correctly or they try to
make the line fit the market instead of the other way around.
In their most basic form, an uptrend line is drawn along the bottom
of easily identifiable support areas (valleys). In a downtrend, the
trend line is drawn along the top of easily identifiable resistance
areas (peaks).
Channels
If we take this trend line theory one step further and draw a
parallel line at the same angle of the uptrend or downtrend, we will
have created a channel.
To create an up (ascending) channel, simply draw a parallel line at
the same angle as an uptrend line and then move that line to position
where it touches the most recent peak. This should be done at the same
time you create the trend line.
To create a down (descending) channel, simple draw a parallel line at
the same angle as the downtrend line and then move that line to a
position where it touches the most recent valley. This should be done at
the same time you created the trend line.
When prices hit the bottom trend line this may be used as a buying
area. When prices hit the upper trend line this may be used as a selling
area.
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