Two weeks ago, we covered building a framework for your trades using support and resistance lines. When we locate and mark lines of support and resistance on our charts, it gives us a framework upon which we can build. It provides a graphical representation of trader sentiment, and it defines pivot points where a stock has been known to historically change direction. All of this information helps us to determine a trading direction and set our price targets.
The support and resistance lines are usually drawn in a horizontal fashion across our line or candlestick chart. However, there are support and resistance lines that move up or down at an angle or in a diagonal line. These identifiable channels or trend lines are known as an uptrend and a downtrend.
The upward trend can be found on a stock that is moving sideways between support and resistance in a predictable repeating pattern while making higher highs and higher lows. These trends usually happen over a longer period of time and are representative of a bull market. Please see the TTWO example below of an uptrend.
The downward channel can be found on a stock that is moving sideways between support and resistance in a predictable repeating pattern while making lower highs and even lower lows. A downward trend usually happens over a shorter period of time and is representative of a bear market. Please see the AMC example below of a long-running downtrend.
When drawing trend lines, we want to start with a line chart and find a significant change in direction. Then connect areas of support on the trend from the first or second significant change. The more points of support we can connect, the stronger the trend line is. Once we have the support line in place, it helps to duplicate it and move the second support line up to create a resistance line for the top of the trend or channel. This will help frame any trades we wish to place while the stock in question is trending. Please see the TTWO example below for a ranged uptrend.
In closing, one of the most essential tools in our trader toolkit is using stock charts for technical analysis. When we are able to break out past price actions into support lines, resistance lines, trend lines, and pivot points, we are able to frame our trades. The framework you draw on each stock will be the very foundation upon which you trade, so jump into line drawing by using a virtual account or paper trading platform, such as TradingView, which you can learn on before trading any real money. Open an account with them today and start framing your favorite stocks for future trades.
Finally, if you wish to learn more regarding this topic, please consider signing up for our Foundations of Stocks and Options class, which you can do here. Thank you, and we will see you next week!