Predictions Using Trend-Line Support and Resistance
Using Trend-Lines To Predict The Market
Sometimes the simple things in life really are the best. And yet, no matter how many times you show someone a simple tool that works wonders, they still insist on adding indicators, mathematical calculations and astrological charts to their trading.
Despite that, one of the most powerful tools in the market I have found is the simple trend line. Not only is it a powerful way to enter and exit and to gauge the momentum of the market, but it also provides a unique way to find future support and resistance in the market. No – not the horizontal support and resistance that most traders are used to, but a dynamically changing, diagonal support and resistance. Seems impossible? Read on. (By the way, if you haven’t read the article on “Trading With Trend Lines”, it is best to read this first).
Using Trend Lines To Predict The Future
So, how do we use this seemingly simple tool to predict the future? It is simple – when we draw a trend line we extend it out past our current time, and then as price comes near it again, it will usually bounce off it, creating support in an uptrend, or resistance in a downtrend.
Let me give you an example (click the picture to enlarge):
As you can see, price in Woolworths (WOW) found support at our trend line 4 times, before continuing higher still.
So what does this mean for our trading? Well, very simply it can help us know what to expect in the future – where price might stop trending and reverse so we can be alert. By extending our trend line we get an approximate area in both price and time for a possible reversal, as opposed to just areas in price with regular methods. For the more advanced of us, we can then use trend lines to buy on support and sell on resistance.
More than this, because a stock won’t find support or resistance at a trend line every time (and you should be aware that nothing in the markets works 100% of the time), there is another purpose it can serve. You will find that where there is a long held, flatter down-trend line hanging over a stock or market, price will remain in a long term bear trend with a high probability – it will try to rise but will often fail before it even gets to the flatter trend line. Likewise with a flat long term up trend line – price will often try to fall but will not even make it to the flatter trend line before rising again. At June 2009 we are struggling to break the flatter trend line resistance, as you can see below (click picture to enlarge):
Of course, the rules of trend lines still apply when extending them – price can’t break through our trend line (and if it does, we have to redraw and flatten it), but these rules are simple and easy to remember. I always say that trading and investing should be fun and not take up too much of our time, and predicting markets using trend lines is a simple and easy way to trade while still leaving lots of time for the family. This, of course, makes me happy!
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July 1, 2009
Tags: Predictions Posted in: Free Trading Course Lesson Backlog
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