Technical Analysis for beginners - part two (trends, support, and resistance zones)

Welcome everyone to part two,

In this article, we will focus on determining the trends, as well as support and resistance zones. You have probably heard many times about trends, some traders trade in the same direction as a trend, some are contrarians. To determine the trend we first have to understand it’s meaning. To simplify,

“The trend is a general direction of a market’s price movement!”

We can have a downtrend (bearish trend), an uptrend (bullish trend), or a neutral trend when the price is moving horizontally, not moving down or up for a significant amount of time.

Today we will focus on a downtrend when the price is falling, and the uptrend when the price is rising. Uptrends and downtrends occur in every market, and traders can determine the trend using various indicators, signals or patterns. The most important thing to remember is that nothing moves straight both to the upside or downside, and that’s why it is important to understand terms of swing highs and swing lows, which helps us to easier determine the trend.

So what are swing highs and swing lows? Swing high is the highest point of the price in comparison with other highs around it, in other words, a peak reached by a price before the decline. Swing low is the lowest point of the price in comparison with other lows around it, the lowest point of the price before it goes up again.

The easiest way to determine the trend is to connect a series of swing highs and swing lows. So let’s visualize neutral trend, an uptrend and a downtrend using swing highs and swing lows.

On the picture above we can see that the price created two swing highs and two swing lows, but it stayed in a range, so we call that neutral range. Let’s see how can we recognize an uptrend:

After the neutral range, the price went above the last swing high, creating higher high, now we have the first indication that the trend is changing, and we have to be patient for the price so it creates another swing low. If the price creates a higher low than the last Swing low, we have determined an uptrend and we can connect those swings with a line.

So an uptrend is a series of swing highs and swing lows, while every next swing creates higher prices. By connecting those swing in a line we can see that the price is going up, we have an uptrend. To determine a trend we will use trendlines, adjusted trendlines or moving averages.

After we have determined that the price is in an uptrend, we trade according to our strategy. In most cases, even after we have determined an uptrend, we can not connect all the swings in a simple line. Trends are constantly changing, from an uptrend to a downtrend, even uptrends are changing to other uptrends, and one simple line isn’t enough to give you magical entries and gains. Next, we want to determine when is the change of a trend, when is an uptrend becoming a downtrend using only swings.

We can see that after the latest swing high (higher high), the price created a lower low, but this time when it went up it didn’t manage to break previous highs, it created Lower high for the first time since we had an uptrend. Now we have the first indications that the trend is changing.

With a combination of other indicators, signals and swing highs and lows, we can determine the possible change of a trend before it is confirmed on a chart. That’s why we have trend traders and contrarians, which style and trading strategy will fit your style the best nobody can know, it takes a lot of time and practice to find your ideal strategy.

Now when we know what uptrends and downtrends are, and how to determine them, let’s talk about the support and resistance levels. Support and resistance zones are the price levels on a chart where the probabilities are in favor that the current trend will pause or even completely change to a downtrend and vice versa. Support is a level which happens when the price is in a downtrend, and it is a zone where the price is expected to pause current downtrend or even change to an uptrend, while the resistance is a level which the price is also expected to pause current uptrend, or even change to a downtrend. There are many ways to determine the support and resistance zones: trendlines, moving averages, horizontal levels, and many other indicators. Today we will focus on horizontal levels and trendlines, we will talk about other indicators in advanced articles, so let’s start.

On the chart above we have a perfect example of horizontal support and trendline resistance, creating a bearish triangle structure (we will talk more about structures in the upcoming articles). As we can see the price touched support three times and every time it went up, meaning that this is the current demand zone where buyers are stepping in. On the other end, we have a trendline resistance (downtrend), and every time the price touched this trendline it went down again until finally, the support was broken.

The picture above is the perfect example of how to determine the trendline and horizontal supports and resistances. Now let’s see another example:

In the chart above, we can see horizontal resistance and trendline support, and with the fourth touch to a horizontal resistance, the price finally broke it and went up. There are numerous ways and examples of determining the support and resistance zones, and usually, when the price breaks up or down from resistance or support levels, it retests those levels again. Let’s explain those movements on a chart:

We can see that the price dropped from the support levels on the 4th touch, and in most cases, those levels will be reached again, and how the price will react to them? The support became a resistance, buyers that were buying those prices now turned into sellers, completely rejecting movement to the upside and continuing with a downtrend. The chart above is the perfect example where horizontal support became horizontal resistance, and in a matter of fact, we can see two signals at the same price point. Horizontal support switching to a resistance on the same price levels where the resistance trendline is connecting, giving double signals that there is a high probability that the price will go down after it reaches this point:

The price was in a downtrend, resistance trendline rejected a move to the upside five times until the downtrend finally finished on the 6th touch. Meanwhile, while being in a downtrend the price created more horizontal resistances and supports, which are important levels to monitor for future price movements.

Now we know how to read the charts, determine the support and resistance zones, as well as the current trend, it is time to explain some candlestick patterns.

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