Subject 3. Trend

One of the most important concepts in technical analysis is that of trend. A trend is really nothing more than the general direction in which a security or market is headed.

  • An uptrend is a situation in which we experience rising prices in the form of new highs and shallow pullbacks.

    To draw an uptrend line, a technician draws a line connecting the lows of the price chart.

  • Similarly, a downtrend has lower peaks and prices continue to make new lows. To draw a downtrend line, a technician draws a line connecting the highs of the price chart.

  • When a security is not trending, it is moving in sideways movements. It indicates a relative balance between supply and demand.

The price of a security seldom moves above resistance or below support.

  • A support level is the price range at which a technician would expect a substantial increase in the demand for a stock. It tends to develop after a stock has experienced a steady decline from a higher price level.
  • A resistance level is the price range at which a technician would expect an increase in the supply of stock and any price increase to reverse abruptly. It will develop after a stock has enjoyed a meaningful price increase and begun to experience profit-making.

Round numbers like 10, 20, 35, 50, 100, and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions.

The change in polarity principle says that a prior resistance level, once broken, should become a new support level.

User Contributed Comments 4

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TiredHand: Change of polarity is meaningless. Look at the chart above - a coincidence has occurred where the 'prior resistance' has become the new support. Actually what this proves is how meaningless the resistance was in the first place
sgossett86: lol tiredhand.

all i can say is that i hope many sections are this easy so that i can have more time to focus on the harder sections.
mikep91: TiredHand you're right. This is voodoo.
farhan92: Not really Voodoo. Voodoo works.