Trading on Support and Resistance plus Trend Reversals
What is support and resistance? I’m not going to get into the technical definition of what these are and how they are determined. I am going to say that support and resistance represent levels or areas where the price is stabilizing in terms of its current direction of move.
- As the price of a stock rises, it will reach a point where it will encounter resistance to go higher. Often times, the resistance point or the upper bound will be tested a number of times, eventually leading to a breach of that price level. Alternatively, the breach attempt fails and the stock begins to move in the other direction by dropping in price.
- Conversely, as the price of a stock drops, it will reach a point where it will encounter support which prevents the price from dropping below that point. And again, there may be a number of attempts to break below support, failing which the stock begins to move in the other direction by rising in price.
Support and resistance levels do not have to be at the historical low and high points. For example, within the low and high points in a 2-year period, there are support and resistance levels that are not at those historical low and high points.
Within a pair of support and resistance points, there will be a number of up and down movements of the stock price. I consider such up and down movements as trends. And where the stock price movements change direction, I consider those the trend reversals.
As the stock price cycles through a series of up and down trends, going through trend reversals, the successive support points will form a trendline. If that trendline is trending upwards (i.e. successive support points are rising), then that represents a broader up-trend. But remember, smaller trend cycles occur within that broader up-trend. Conversely, there is a broader down-trend if the trendline is declining.
To further illustrate the point that smaller trend cycles exist within the broader trendline, money can be made trading long positions in a stock even in a broader down-trend (but a good trend following system is needed). This is a hard way to trade but it illustrates my point.
Trading the trend cycles can be profitable. Further confidence can be gained by using the broader trendline to know if the stock is in an overall up-trend or down-trend.
More you might like
Trading Success with Candlestick Technical Analysis
This article explains how to succeed in trading using candlestick technical analysis.
React to Technical Analysis Indicators to Trade the Rise and Drop in Stock Prices
This article examines the approach of trading stock price cycles as a means to achieve repeated trading profits in short-term trading. Take what the stock markets will give you.
What to Look For in a Technical Analysis System
This article covers the key attributes to look for in a technical analysis system.
Trading Research in Motion post Q1/2009
This article covers my observations on the trading of Research in Motion. With its huge rise leading up to and following the latest earnings announcement, where is the stock headed in the near term?
Trading with a Trend Following System
This article provides insights into the thought process of a person engaged in learning about stock market trading.
