Technical Analysis Market Trends, Support and Resistance

Part 8.3 Technical Analysis. Market trends, Support and Resistance
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This mini-blog is part 3 of our Introduction to Technical Analysis unit which forms part of our free introductory course in financial trading. This mini-blog consists of the following:


Trends

Markets Can Be In One Of Two States

“The trend is your friend” is a common saying in the markets and for good reason. If you are looking to increase your probability of making a profit then by far the easiest way of doing that is to work with the prevailing trend and this is what the majority of traders will try and do.

All markets do one of three things: generally move in an uptrend (Bullish), generally move in a downtrend (Bearish) or move sideways (Ranging). As such each market can be seen to be in one of two states, trending or ranging. 

A bullish trend is normally identified by the creation of higher highs and higher lows and a bearish trend as lower highs and lower lows as can be seen in these chart examples.

Bullish OR Uptrend
Bearish OR Downtrend

An issue that many traders find confusing is that the identification of trend lines can sometimes be subjective. Although the trend lines in these chart examples are obvious, different people could have drawn these lines in slightly different places.

Unfortunately this is the case with all the patterns you will learn. It is very rare to see a ‘perfect’ pattern form on a real chart. Don’t let this discourage you. 

The best advice that I can give anyone that is looking to build and test a strategy is to be as consistent as possible in how you apply and measure whatever pattern or indicator you use.

Ranging markets are markets that move sideways or where you can’t see either a bullish or bearish trend forming as seen in this example.

Ranging Or Sideways Market

Support and Resistance

Support and resistance are the most widely used tools in trading. Also known as floor and ceiling prices, these are areas on a chart that traders watch closely. Support is a level that a price will struggle to break through on the downside and resistance is a level that the price struggles to break through on the upside.

Areas of support and resistance are identified in many ways but some of the most common are:

  • Historic highs or lows
  • Previous day’s highs or lows
  • Psychological levels (like round numbers, all time highs or lows)
  • Technically derived levels (Pivots, Fibonaci, etc)
Support And Resistance

The importance of support and resistance is seen when a market breaks one of these lines or is rejected by them. The breaking of these levels can signal a change to the prevailing trend. A breakout that fails or a strong rejection can signal that the prevailing trend will continue or even strengthen.

This is important as the majority of traders will want to trade in the direction of the prevailing trend (to increase the probability of a profit) which means any indication of a change may create volatility and trading opportunities. 

When a level of support and resistance is broken and a new trend is formed then what was support becomes resistance or what was resistance becomes support.

Resistance When Broken Can Become Support

Channels and Trendlines

Another form of support and resistance are channel lines. These are a diagonal form of support and resistance lines that form at the top and bottom of a trend.

Similar to trendlines, channels can also be used to identify support and resistance levels. A channel provides both support and resistance for the price by its lower and upper channel line. This chart shows a support and resistance in a rising channel.

Channels Are Diagonal Lines Of Support And Resistance

Here, the trendline support and resistance levels are not drawn by horizontal lines, but by upward or downward sloping trendlines. 

Each time the price approaches a trendline, there is a high chance that the price will bounce off it. The trendline should have at least three price touches before it is considered important. As with horizontal support and resistance, a breakout of a trendline can signal a change of trend.

Breakouts Can Signal A Change In Trend

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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