Concepts to Learn
Google these terms and until you feel comfortable you know what they are.
Bull Trend, Bear Trend, Sideways Trend or Consolidation
Support, Resistance, Pivot Point
Channel, Trend Lines
Using Think or Swim look at your favorite stock tickers and screen shot examples of each concept presented here.
Save your screen shots on a folder on your computer or save them online using Lightshot (see next box for instructions).
This is the bull trend that developed after December 2018 correction.
A Bull trend is characterized by higher highs and higher lows in the price. The trend is not over until the price starts breaking the previous swing lows established by the previous support levels.
In 2020 the market hit new highs in February 19. The subsequent pull back would have been healthy if not for the COVID-19 pandemic which resulted in the fastest drop in the market in years.
We are currently still in this trend.
A sideways trend is characterized by the price neither going up nor going down. Also called Consolidation, the price moves inside an invisible boundary called a Channel.
You can make this channel visible by drawing lines at Resistance and Support levels.
Resistance is the price level where an uptrend can be expected to pause because of the presence of sellers. A failure of the price to break through Resistance can result in the price moving lower because traders decide to sell off.
As a day trader you can choose this level as a potential target area where you will liquidate your position. You can also choose to hold your position if you feel that the price may just consolidate lower before it gathers enough strength to break through Resistance.
Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest.
You can choose this level as a target area for buying into the market. There should be at least three (3) touches of Support in order for you to feel confident that the level will hold.
Beginner traders are scared of buying at this level because the price could break lower, but once this level holds, this is the lowest price you will pay for the stock and also the shortest (and cheapest) distance to your stop loss.
Invisible boundary with a bottom and a top where the price moves higher and lower without breaking either boundary.
Also called Consolidation, this quiet period can give birth to breakouts either to the upside or downside in the direction of the dominant trend.
Always wait until the body of the candle crosses either boundary line to confirm that it is a breakout.
Pivot Point is an area where the price trend switches to the opposite direction.
You can plot this in any time frame you want depending on how you prefer to trade. A price break above the pivot area is a signal for the start of a new up trend. Find a good entry during a faster time frame, calculate your stop and prepare to ride the trend.
Draw these lines on your chart by connecting the higher lows of the price in an up trend. Once it breaks your trend line, it’s a signal that your trend is ending.
In this SPY (SP 500) chart, the bear trend is signaled by a trend break and confirmed by the failure of the Support|Pivot area to hold the price.