Lesson 14. Definitions: trend, correction, reversal, support, resistance
Take a look at the price chart. As you can see, the price never moves in straight lines, there are series of highs and lows.
The general direction of the price movement is called ‘trend’.
There are 3 types of trends: uptrend or the bullish trend, downtrend or the bearish trend and sideways trend which is also called flat or horizontal.
It’s important to determine the trend because trading in the direction of the trend (buy during the uptrend and sell during the downtrend) is less risky and more profitable.
As traders say, a trend is your friend.
It’s common practice to draw trend lines. Resistance line is drawn through the price highs and limits the upside.
The support line is drawn through the price lows and limits the downside.
The continuation of these lines to the right, beyond the point occupied by the price, allows determining the future zones where the price may stall and change its direction.
Resistance and support can be also represented by horizontal lines. These lines are usually drawn through the previous highs and lows or determined using other technics.
The price is more likely to reverse down at a resistance level, though a break above it opens the way for further price growth until another resistance level.
Same is with support. The price is more likely to bounce up from support level rather than break below it.
However, once the price has passed this level, it will likely continue dropping until it finds another support level.