Page 57 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

type of trade is done in a margin account. Trading on margin carries additional risks, so
please make sure you understand them before opening this kind of position.

Support equals resistance?
Another tenet of technical analysis is support equals resistance. If price action can
break the floor of support and trade lower, this area becomes future resistance. So, the
area where demand was readily available now becomes a price level where supply
increases.

This is also true in reverse. As a stock price moves higher, it may encounter resistance,
or an increase in selling pressure. If the forcefulness of buyers is able to overcome the
increase in selling pressure, the stock price may break through resistance and trade
higher. Going forward, the area of previous resistance now acts as new support.

Trading range
A trading range is when the price action seems to Ping-Pong back and forth between
known areas of support and resistance. There are two main schools of thought on how
to approach trading ranges. Some believe the sideways price action will continue, so
buyers will buy toward the support level and sellers will sell at the resistance levels.
However, another approach is to wait to see if the trading ranges are broken. If the price
action breaks above the resistance, buyers will enter at that point with the expectation
higher prices will continue. A bearish trader would wait for support to fail and then sell
into weakness expecting the prices to continue lower.

Trends and countertrends
The trend is the overall direction in which the stock is expected to go. Evaluating the
trend’s direction, along with its strength and duration are often the first steps taken when
performing technical analysis.

Trending stocks rarely move in a straight line, but instead in a step-like pattern. For
example, a stock might go up for several days, followed by a few steps down (termed a
pullback) during the next few days before heading north again. This behavior can
camouflage the true trend to the untrained eye. If several of these zigzag patterns are
strung together, the chart appears to be moving higher with some degree of estimation,
characterized by higher highs and higher lows. The main trend is up, and the
countertrend is slightly down. Each peak before the pullback is known as the local or
swing high.
Although they’re usually not as orderly as uptrends, downtrends also move in a zigzag
or step-like fashion. For example, a stock could decline over the course of many days.
Then it may retrace upward (known as a bear rally) over part of the loss for the next few
days before turning south once more. When this behavior is repeated over time, the
downtrend of the chart becomes easier to see and a technician will notice the lower
highs and lower lows. The move downward is the major trend, with the low of each

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