Price Action Reading: Trends: Reading a Paragraph and finding conclusion (Support and Resistance Levels)

We all have been giving examinations from our childhood. The major weightage in the examination would be given to paragraphs and there is a reason for that. It is not possible to read or write a complete book in one go, and one-word answers are ineffective in checking students' understanding. Though one-word answers are good with checking memory power, understanding could only be checked effectively with answers where the student can write one or two paragraphs on the topic. 

The same is the case for price action; while one character or word is good enough to take entry decisions, to really understand what the market is trying to tell you a complete paragraph has to be read and understood not only that but you have to mark important lines as well so when its time for the real examination you can only read that line and revise complete paragraph out of it. 

So what are the lines and paragraphs in the language of the stock market?

Trends are the paragraphs in price action and important lines are support/resistance levels.

Trends

In price action, the trend is nothing but a major direction of price movement. If the price is majorly going upwards it is in an uptrend and if the price is majorly going downwards it is in a downtrend. If prices are neither going upwards nor going downwards but swinging up and down, it is said to be sideways trends. 

Saying this is easy but when one looks at the price chart deciding whether prices are going upward, downward, or sideways is hard for newbies. So to decide the trend of chart one may make use of following tips.

Uptrend

• Prices are making higher swing highs and higher swing lows.
• Prices are trading above 50 Period Moving Average.

Down Trend

• Prices are making lower swing highs and lower swing lows. 
• Prices are trading below 50 Period Moving Average.

Sideways Trend

• Prices are making same or lower swing highs and same or higher swing lows.
• Prices are crossing 50 Period moving average every now and then.

Above are few tips to recognize the trend but remember every trend bends at the end. So try identifying trends earlier. 

Supports and Resistances

Support and resistances are important price levels at which the prices tend to stop or change the direction of movement. The easiest way of marking support or resistance is to mark swing highs and swing lows. Whatever marking you have on your screen are important levels.  All the markings below the current price are supports and above the current price are resistances.  

Take a look at the above image showing a complete trade from entry to exit. The horizontal lines marked are support and resistance lines. You can notice every swing level is marked with two horizontal lines (at swing highs body high and wick high and at swing lows body low and shadow low). These two lines can be considered to be a zone of possible support when prices are trading above it and a zone of possible resistance when prices are trading below it.  

Marking these levels is like marking important lines in a paragraph. Once you have marked swing levels you should only focus on the candlesticks forming near these zones and anything forming far from it can be neglected as it is not of major importance.

I hope you have understood both the topics discussed today. If you have any doubt please feel free to ask them in the comments section.

In further articles, we will take a few examples of past investment opportunities. In that, we will discuss both technical and fundamental aspects of the investment so all the concepts we have discussed will be applied together and we will get a fair idea of the complete analysis process.  

Till then take care and don't forget to Read to Learn Investing.