Trading on Support and Resistance plus Trend Reversals
What is support and resistance? Iím 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
This article covers what candlestick patterns indicate as it applies to trading decisions.
This article examines the domination of emotions over stock trading actions. Even if you know what to do, your inability to suppress emotions will lead to bad trading results.
This article covers two approaches to dealing with candlestick technical analysis. The trader can learn the candlestick patterns, the situations in which they translate into trend reversals, and apply the analysis to trading decisions. Or the trader can use the assistance of software.
This article compares paper trading with trading involving real money. Failure in paper trading is a sign that the person should not partake in real trading. Success in paper trading does not necessarily mean a person will succeed in real trading.
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?