Trend Chart: Support and Resistance
On a daily chart, let’s say you draw a moving average line with the long period for 50 days. You can observe that the line is relatively straight several times. However, the emergence of an underlying trend in price movement is evident. The daily trend may have upward and downward movements and they are producing either a gain or loss around moving average line but the trend is yet clear. This phenomenon has been widely observed through various types of chaotic data and even random or pseudo-random data.
For instance, we frequently know that the unemployment has an upward movement but the underlying has a downward one. The seasonal variations could have several references. In a trending data, where there is a mean gain or loss, there might be a tendency of a return towards the mean. We can depict this in familiar terms by observing a price chart. The occurrence of a sharp rally and its movement above the mean gain slope is usually followed by a reaction back down through the mean and below it, then there would be spontaneous compensation for the up-move. Clearly, this is the mean’s property and not the data.
However, we know that the occurrence of upward and downward movement in an Index was due to the supply and demand’s imbalance which was created in the underlying stocks. Remember that as the market escalates, the market consequently loses equilibrium. In restoring a temporary equilibrium, the reactions chart rallies. Another way to restore a balance is during persistent bull moves where there would be the existence of periods of re-accumulation or congestion areas.
The close study of trend lines which were drawn correctly will present that the price may appear to oscillate within the bouncing trend lines. A trend line may perform to offer resistance to a move through it as mentioned earlier. Moreover, you will also observe the process of trend lines being penetrated then offering resistance however, from the opposite direction.
Meanwhile, there are seven important types of support and resistance. Below are the brief discussions of each type.
What are the types?
Traditional Swings Highs and Lows
- Out of the seven, this is the most important type. We can find these levels by zooming out to a longer time frame, typically in a weekly or monthly chart. This is where we can also acquire the market’s “bird’s eye view” and major turning points within it. Observe the chart below.
Stepping Swing Point Levels in Trends
- From the name itself, these are “stepping” levels when they form, market breaks in upward or downward movements through then we can find places to trade on retracements back to those levels, also called as trading pullbacks. Consequently, this would provide us with a way to map the market trend. Once you observe this stepping phenomenon, you are assured to have placed a solid trend. Further, these levels are good entry points and points in describing risk or stop-loss points. Using the other sides of these levels, placement of one’s stop loss is possible. See the chart below.
Swing Point Levels as Containment and Risk Management
- Finding to sell or buy at swing points is possible even though they are not part of a trend. As markets spend enormous time in consolidating and trading ranges, we should be able to look trades within those market conditions and not only in trends. We can utilize the most recent swing high and low as a risk point to describe our next move. See the example in the chart below.
Dynamic Support and Resistance levels
- Dynamic is about moving levels or averages. A moving average moves in upward or downward movements depending as to what price is doing and it would be possible to set to consider a certain number of bars or time periods.
50% Retracement levels
- There is a proven phenomenon that markets frequently hold the halfway point of a swing (circa 50 to 55% area). This is where markets create massive movements then retrace and lastly bounces in the original direction. This is partly an event of self-fulfilling and normal market dynamics’ result.
Trading Range Support and Resistance Levels
- The trading range support and resistance levels can give numerous entries, which are of high probability and opportunities for the savvy price action trader. Firstly, one should identify the trading range – the bouncing of price between two parallel levels in the market. Then, at those levels, one can find for signals on price action or look to weaken the level on a blind entry. Observe the chart below.
Event Area Support and Resistance
- Event areas are propriety forms of support and resistance. Moreover, these are the key levels where the event of a major price action might occur. This can be either a big reversal or clear price action signal under which both could lead towards a strong directional move.