Support & Resistance, Trendlines & Channels Flashcards
Resistance
A level deformed when a large number of sellers want to sell at the same (high) price. Investor supply overcomes demand
Support
A level formed when a large number of buyers are prepared to buy at the same (low) price. Investor demand satisfies supply
How do support and resistance levels become stronger
The more times the level is touched by the price and the longer it remains in tact
Breakdown
When price quickly falls, usually after a period of support
Breakout
When price quickly rises, usually after a period of resistance
When are breakouts and breakdown most severe?
When the strength of the resistance/ support has become very strong
What is a sign that support will lead to a breakdown
The long term trend direction is down and the highs are getting lower, illustrating increased selling pressure
What is a sign that resistance will lead to a breakout
Rejections become increasingly aggressive, the longer term downward trend and lows getting lower
What should you do to reduce your initial risk of a trade before entering?
Reduce your trade size (number of shares bought). Do not reduce your stop loss to a position which isn’t correct.
Uptrend
When each trough and peak is higher than the previous
Downtrend
When each trough and peak is lower than the previous
Uptrend line
A line drawn connecting a series of at least 3 higher pivot lows
Downtrend line
A line drawn connecting a series of at least 3 lower pivot highs
What makes a trend line strong
Has more than 3 touches
Remains valid for a long time
Has a sustainable gradient
Trend channels
A line drawn parallel to the trend line to contain all of the price action
