Trend Trading Report Part VII - Support, Resistance, & Trend Lines

In this Part of the Trend Trading Report we'll cover support, resistance, and trend lines. Even if you have some experience trading stocks or forex, you're likely to find some valuable information in this part of the Report. Support, resistance, and trend lines are an integral part of becoming a successful Trend Trader. Don't take these subject lightly.

Support
A support line is defined as a price level that acts like a barrier preventing the price of a stock from moving lower. Support is evident in stock charts where the price is trending upward, downward, and sideways. This is important as it points out the fact that the support line can be sloping up, sloping down, or horizontal. In all cases, falling prices have a tendency to bounce off of support and move higher.

Following is a chart where price is moving higher. Note how the straight support line touches the downward dips in price movement at least five places. In each case the price bounced off of support and moved higher. Finding good entry points in your trading will improve when you can properly identify support lines.

Resistance
A resistance line is defined as a price level that acts like a ceiling preventing the price of a stock from moving higher. Resistance is evident in stock charts where the price is trending upward, downward, or sideways. This is important as it points out the fact that the resistance line can be sloping up, sloping down, or horizontal. In all cases, rising prices have a tendency to bounce off of resistance and move lower.

Following is a chart where price is moving lower. Note how the straight support line touches the upward price movements at least five places. In each case the price bounced off of resistance and moved lower. Finding good entry points in your trading will improve when you can properly identify resistance lines. Don't get too hung up by the fact that price penetrated above the resistance line as long as the price quickly retreated below resistance.

Trend Lines

Upward Sloping Trendline

• Upward sloping trendlines are a signal that the demand for the stock is greater than the supply causing a rise in the price of the stock.
• These lines are drawn below the price and connect a series of closing prices (lows).
• On the graph below, note the successively higher bottoms in an upward sloping trendline. If this is truly a trend, the trader will be able to draw a line through a minimum of 3 lows

Downward Sloping Trendlines

• Downward sloping trendlines are a signal that investors are more inclined to sell the stock than to buy it and there is likely more supply of stock to sell than investors wanting to buy it at the current price.
• These lines are drawn above the price and connect a series of closing prices (highs).
• On the graph below, note the successively lower tops in a downward sloping trendline. How many points can you see that touch this trendline? (I count more than 6).

Benefits of a Trendline

• This line makes it easier to see a trend.
• This line helps in the prediction of future price behavior for a stock.
• It helps the trader to see a level beyond which the stock price is not likely to move, a line from which the stock price is likely to bounce.

Summary

For more details, click on support, resistance, or trendlines.

As an optional homework assignment, look at several stock or forex price charts and see if you can identify some upward sloping trendline where you draw the support line under the prices, but where prices touch the trendline at least 3 times. Also look for downward sloping trendlines where you draw the resistance line above the prices, but where prices touch the trendline at least 3 times.

End of Part Seven

Part VIII of this report will be released in about one week. The topic is "Trend Following Patterns".