Support and Resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying.
As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
There are three types of trends:
- Uptrend (higher lows)
- Downtrend (lower highs)
- Sideways trends (ranging)
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.
- Ascending channel (higher highs and higher lows)
- Descending channel (lower highers and lower lows)
- Horizontal channel (ranging)
A price level on a chart where historically the trade has had difficulty falling below. The price level acts as a floor and prevents the price of the trade from falling any further.