Support and Resistance are really lateral trend lines. There are trend lines that move diagonally and are the primary components of a wedge. The wedge has a floor and ceiling trend lines. When you combine trend lines in such a manner you get what is known as a channel.
TrendStockCharts.com Definition
Refers to the direction of prices. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than a year), intermediate (one to six months), or minor (less than a month)
What is a trend?
Direction of prices.
Now regarding the classification. I really don’t care for the bracketed info, not that it isn’t correct but its a matter of perspective. The major is the larger overall trend, inside of it there is an intermediate trend that will bounce up and down inside the major trend without breaking it. And inside the intermediate, you have a minor or more immediate trend that does the same thing.
You may have a major trend in the hourly and it will have the intermediate trend in minutes and then minor trend in the tick charts. And then you can shift your perspective in the weekly, daily, hourly. Psychologically, this is where people break down. They don’t understand how to work in these timeframes where they are confident that the trend they understand is still intact. They work in the daily weekly trend and see the hourly take them down in points and they think they have lost their trend but they haven’t in the larger timeframe from which they based their entry on. More on this later.
TrendlinesStockCharts.com Definition
Straight lines drawn on a chart below reaction lows (in an uptrend) or above rally peaks (in a downtrend) that determine the steepness of the current trend. The breaking of a trendline usually signals a trend reversal.
Trendlines give you a graphical understanding of the market movements. So long as the action does not break your lines, the trend remains intact. Breaking the trendline means the candle closed outside of the trendline. If it just deviates the boundary but does not close, then your trend is still sound. We’ve already discussed how to set stops.
In this image you see #1 as the major trend, and #2 as the intermediate or minor trend. One trendline on its own is not as powerful as when you combine 2 trendlines to make a channel, and it will help with that issue we mentioned above.
ChannelStockCharts.com Definition
When prices trend between two parallel trendlines, this is referred to as a channel.
In the graphic above, the green lines are more textbook to the definition of a channel. However, a wedge is a channel as well. The lines not parallel because eventually they meet, but it is still proper use of trendlines to form a channel.
The yellow lines show you a major trend. As you see the price action bounce within that channel, it is quite obvious that you don’t want to go long at the top of the channel but at the bottom. And you don’t want to short at the bottom of the channel, generally (if this was a bear wedge and it is about mature and you are late to the party, perhaps you can get a few points, perhaps), because you will sustain major pain. The general rule is this: “Short at resistance. Go long on support.”
All seems like simple common sense, but you wont believe how many people don’t take the time to understand. They get all mean and angry and hateful about the world, the government, and whom ever else they think is messing with them. Fate has conspired against me and I know who is responsible! Laughable!! If they took the time to understand the technicals, they would be much happier. I know, I was once like that.
If you notice the crazy ups and downs within a long term trend, you will also see the same kind of action in the hourly minutes of the intraday, just to form 1 day candle. What you have to decide is this, what timeframe are you basing your trading decisions on? If you are in the daily, stay with in the daily expectations and don’t fret about the wild swings of the intraday. But by all means understand your stops on the daily chart basis. In the course of the day, you may see that stop deviated but if the daily candle doesn’t close at or beyond it, then your daily play is still intact. Understand your range and understand what needs to happen to get to your target and what must not happen (stops) to break your play.
Use the shorter timeframes to get the best and earliest entry you can. If you are about to short at resistance, you can get into the shorter timeframes and wait for the distribution to happen at resistance. If you are about to go long, wait for the price action to come to your support and begin to accumulate.
For a more elaborate explanation trendlines and channels, checkout StockCharts.com Trendlines and StockCharts.com Channel. No I don’t work for StockCharts.com, I just like their site for info. Check out my links on the left for more sites I visit.