9. Summary: Support and Resistance, Trend Lines, Channels

Summary of Support and Resistance Trend Lines, Channels

When the market moves up and then pulls back, the highest point reached before it pulls back is now resistance. 

As the market continues up again, the lowest point reached before it climbs back is now support.  

One thing to remember is that horizontal support and resistance levels are not exact numbers. 

To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers. 

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. 

Another thing to remember is that when price passes through a resistance level, that resistance could potentially become support. 

The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level 

Trend Lines

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).

There are three types of trends:

1. Uptrend (higher lows)
2. Downtrend (lower highs)
3. Sideways trends (ranging)

Channels

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.

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.

1. Ascending channel (higher highs and higher lows)
2. Descending channel (lower highers and lower lows)
3. Horizontal channel (ranging)

Trading support and resistance levels can be divided into two methods: the bounce and the break.

When trading the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels like a knife slicing through warm butter.

As for trading the break, there is the aggressive way and there is the conservative way. In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease. In the conservative way, you wait for price to make a "pullback" to the broken support or resistance level and enter after price bounces.

Quiz Time :  Frequently Asked Questions and Answers.

Q: In a bull market, a ____ level is an area that price has difficulty breaking through to the downside. 

 A: In a bull market, a support level is an area that price has difficulty breaking through to the downside.

Q: When price breaks through a resistance level, it could potentially become... 

A:  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.

Q: How many tops or bottoms does it take to confirm a trend line?

A: It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.

Q: When drawing trend lines, you should...

A: DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn’t a valid one!

Q: When price is trading within a channel, what is it doing?

 A: The market is trading within a channel if price trades within two parallel trend lines.

Q: A descending channel is characterized by...

A: A descending channel is characterized by lower highs and lower lows.

Q: Generally, the ___ of a channel is considered to be a ____ zone.

 A: Generally, the bottom of a channel is considered to be a buy zone.

Q: When trading off support and resistance levels, you generally should...

A: When playing the bounce, we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering.

Q: When trading the break of support or resistance levels, the conservative way would be to...

 A: Instead of entering right on the break, you wait for price to make a “pullback” to the broken support or resistance level and enter after the price bounces.