Chapter 11 – What are Trend Lines?
What are trend lines?
- Tops show where bulls run out of steam, bears take control.
- Bottoms show where bears run out of steam, bulls take control.
- Shows psychological points of crowds in the market.
- E.g. turning points, direction of movement.
- Provides support or resistance.
- Oldest, most basic, yet very important in technical analysis.
- Can be drawn on prices, volume and even oscillators.
- Easy theory, yet confusing applications.
- Much experimentation and practice before mastering.
- Connect two or more tops or bottoms.
- Up-sloping trend line (TL) connect final low with the first higher bottom in a rally.
- Top to top – resistance TL.
- Bottom to bottom – support TL.
- Down-sloping trend line connect final high with the first lower top.
- Top to top – resistance trend line.
- Bottom to bottom – support trend line.
- Flat or near to flat sloping trend line – connect top to top, bottom to bottom.
- Can be horizontal line.
Chapter 12 – Drawing Trend Lines
Drawing trend lines
- Practice, practice, practice – this is the tip!
- What type of price charts?
- Bar chart, candlestick chart or line chart?
- Weekly, daily?
- Depends on your investment/trading timeframe.
- Always check back with the next larger timeframe.
- Closing prices or high/low prices?
- Closing prices.
- Show the price that crowd are willing to take home.
- Edges of congestion areas.
- Show where majority have traded.
- Extreme highs/lows/
- Extreme bulls/bears, an action of over-stretched bulls at tops, over-stretched bears at bottoms.
- Closing prices.
- Trend line don’t touch all points? Some prices jutting out?
- Prices fall out of trend line due to extreme prices.
Apply common sense as much as strict technical analysis rules.
Fit the first two visible high/low points. If this trend line ‘runs out’, take next high/low point to connect with the subsequent high/low.
Slope of trend line
- Up-sloping – bulls in control, long position.
- Down-sloping – bears in control, short position.
- Steep-sloping gradually becomes gentle-sloping trend line suggests weakening in the underlying trend.
Chapter 13 – Determining importance of Trend Lines
Determining importance of trend lines
- Longer the timeframe, more important and more valid the trend line.
- Trend line in weekly chart identifies more important trend than a daily time frame.
- E.g. Trend line extends 2-3 years will result in bigger signals than trend line over 3-6 months.
- More contacts between prices and trend lines, more valid it is.
- Each touch or very near touch shows strength of this support/resistance.
- Thereby showing strength of underlying trend.
- Angle of ascent or descent.
- Sharp trend difficult to maintain, likely to be violated more quickly.
- Would likely to result in a short corrective move, and resume trend at more gradual pace.
Chapter 14 – Support and Resistance
Support and Resistance
- Simple, effective, very important, communication often confusing.
- SAR represented by a horizontal or near-horizontal line.
- Price level where bulls are strong, buying is strong.
- Price level where bears are strong, selling is strong.
- Before you trade, get all your support and resistance levels.
- Use this to manage your risk.
- Support and resistance exist because people have memories.
- Prices have stopped falling and reversed up from a certain level → tend to buy or stop selling near that level.
- Prices have stopped rising and reversed down from certain level → tend to sell or stop buying near that level.
- Support and resistance exist because people feel pain and regret.
- Traders with losing position want to get exit position if market gives them a chance.
- Traders who missed opportunities feel regret and wait for the market to give them a chance to buy/sell.
Technical analysis works on probabilities but there are “rules” to follow
Mantra for support and resistance levels
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