Upbeat music plays throughout.
Narrator: Charting platforms often have an array of drawing tools that can help you identify trend and support and resistance. In this video we'll look at three: trendlines, price levels, and Fibonacci retracements.
On-screen text: Disclosure: Example used is for illustrative purposes only. Not a recommendation of any security or strategy.
Narrator: For this example, we'll use Toyota Motor, symbol TM. Let's start with a basic trendline. Sometimes it's tough to see the trend initially—trendlines really help make the trend clearer. They're also used to draw support and resistance.
On-screen text: Disclosure: The paperMoney® software application is for educational purposes only. Successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period as market conditions change continuously.
Narrator: In paperMoney®, there are several ways to add a drawing.
Animation: He selects the arrow in the lower left-hand corner for a list of drawing tools. He selects the tab above the chart with the pencil icon labeled Drawings.
Narrator: I can click the Active Tool button here; or right-click and select Add a drawing; or I can click the Drawing button here. Let's do it this way for this example. From the menu, I'll select Trendline.
Animation: A downward line is drawn from a high in mid-October of 2014 to a high in mid-May of 2014.
Narrator: To draw a line, I'll start by clicking the highest point on the trend, then connecting it with other highs. This creates a line. As you connect these points, try to join as many highs as you can. The downward slope of this line confirms a bearish trend. It also makes a diagonal resistance line, which could be used to identify resistance bounces for bearish trades or breakouts for bullish trades.
Let's draw another trendline. This time, I'll click the low in October and then click the highest low in March, connecting as many lows as I can. This is a bullish uptrend and diagonal support. This line can be used to identify support bounces for bullish trades or breakouts for bearish trades.
Now, let's try a different tool—the price level. This time, I'll right-click, go to Add a Drawing, and select Price Level from the menu. This tool allows you to draw perfectly horizontal support and resistance lines. This is helpful when you see a significant price level and want to consider how it might impact price in the future.
For example, Toyota made a significant high back in October 2013. I'll draw a price level by double clicking at this resistance level—this will help me see how it affected the stock price later on.
Here we can see where this price level acted as resistance in February 2015 and then support in June and July 2015.
When support broke in July, a bearish entry signal appeared, and a selloff followed.
The last drawing tool I'll demonstrate is the Fibonacci retracement. Technicians generally use this tool when they've identified a trend and want to get an idea of where that trend is headed. It helps to identify potential support or resistance levels within a trend by predicting potential areas of retracement.
For example, a technician might use the tool when price looks like this. We just observed a downtrend and want to try to determine if and when the stock will retrace.
To change tools, I'll select Fibonacci Retracement from the Drawings menu.
Animation: A downward line is drawn from a high in mid-October of 2013 to a low in mid-March of 2014. Screen shows the percentages and price levels associated with this specific downward line.
Narrator: Next, using the trend we're interested in, I'll click the high point and then click the low point. This draws all the retracement levels over the chart. Now, we're simply looking for a resistance bounce.
On-screen text: Disclosure: CAHOLD is an acronym for a Close Above the High of the Low Day which describes a resistance bounce.
Narrator: Once a bounce or CAHOLD occurs, we could consider it an entry signal.
Animation: A yellow line highlights a bounce in April 2014 to September 2014.
Narrator: Notice the stock rallied to the 61.8% level and found resistance.
Let's use this tool again, this time with a bullish example. First, I'll remove the bearish example by placing my mouse over a line and right clicking. Then I'll click Remove Drawing.
The stock's been up trending since October. If we wanted to trade this trend, we could apply the tool to a rally within this trend. I'll trace the rally that started on February 9 and ended on the 24th.
Animation: A yellow line highlights the pullback a few days into March of 2015 with a bounce near mid-March of 2015.
Narrator: As I scroll forward, you can see the stock pulled back to the 50% retracement and bounced. Then it rallied to new highs.
You can see that the previous low became a prominent support level.
The trendline, price level, and Fibonacci retracement tools can help you identify trend and support and resistance. After identifying these significant levels, you can consider using them to take action as you buy and sell.
Because trend and support and resistance are often easier to spot in hindsight, you may want to consider spending some time practicing with historic examples as we've done in this video. Doing so will help you as you use these tools in real time.
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