By now you are quite well aware of the value of trends and trendlines. Mostly you are aware of the predominant supporting trendline, but there is also often a resisting trendline as well. In this section we will discuss this other trendline. First of all I should clarify the meaning of “support” and “resistance”. Generally speaking, “support” is a price level, as might be considered by a trendline, that supports the market. Think of it as a floor that the market can bounce UP from. Conversely, “resistance” is a price level that pushed the market back down. Think of it as a ceiling that the market gets restricted by and bounces DOWN from. In the next section I discuss the topic of previous support & resistance, which is a different topic than what I will talk about here in this section. When you see a triangle or a sideways consolidation you’ve been using the concept of drawing trendlines to show probable areas of both support and
resistance. As the market moved upwards through the range it bounced off
your ceiling of resistance; where you drew your top trendline. As the market
moved downwards through the range it bounced off your floor of support;
where you drew your bottom trendline. Thus you are already familiar with the
idea of trend channels; you have two trendlines that offer support and
resistance as the market trades through the range between the two lines.
The above example shows a trend channel. Notice how the trend remained
constricted within the channel as it bounced the bottom support (blue line) and
the top resistance (red line).
Here is another example, this one where the channel got wider. Remember
that once you have three connecting points it is amazing how often the market
will continue with that trendline.
Sometimes you’ll see textbook perfect examples on your charts of trend
channels, and sometime you’ll have to be a little looser in your interpretations
of where your lines are (sometime the lines line up perfectly, sometime “more
or less”).
Ok, so how do you use these opposing trendlines?
Well if you are trading THAT trend then you simply ignore the opposing line,
trailing your stops, and ride the trend for as long as it lasts.
If you are trading a smaller (fractal) trend on a smaller scale chart but see that
the market is approaching the opposing trendline of a larger trend on a larger
scale chart then now you have a “reason” to assume that around there the
smaller trend you are trading within is likely to end, so watch for reversal
signals to exit your trade and start aggressively trailing your stop or “scalp” an
exit near the top.
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