Trend, support and resistance
Trend direction on a chart
The word trend means the general direction price has moved over a period you choose. On a chart, an uptrend is a sequence of higher highs and higher lows. A downtrend is a sequence of lower highs and lower lows. When neither pattern holds, the market is often called range-bound or sideways.
To read a trend, first pick a time frame. A daily chart shows the trend over months. A one-hour chart shows the trend over days. The two can disagree, and that is normal. A market can rise on the daily chart while falling on the hourly chart.
You do not need to name the trend correctly every time. The point is to know which direction you are trading with, and which direction you are trading against. Trading with the trend is not safer by itself. It simply means the larger moves have recently gone that way.
How support and resistance levels form
Support is a price area where falls have stopped before. Resistance is a price area where rises have stopped before. They are not lines drawn by an exchange. They are zones where many orders have been placed in the past. Those orders can be buy orders, sell orders, or stop-loss orders.
A level becomes visible when price touches it more than once. Two touches are a hint. Three or more touches suggest that many participants are watching that area. The level is not a rule that price must obey. It is a place where the balance of buyers and sellers has changed before, and may change again.
Levels can break. When price closes clearly beyond a level, the old level often changes role. A broken resistance can later act as support. A broken support can later act as resistance. This is not a law. It is a common pattern that many traders watch, which can make it self-reinforcing for a time.
Orders that sit around a level
At a support level, buyers may place limit orders just above it. Sellers may place stop-loss orders just below it. If price falls to the level, those buy orders can slow the fall. If price then breaks below, those sell stops can add to the fall. That is why a small move past a level can become a fast move.
The orders are not visible on a price chart. You only see the result: a turn, a pause, or a break. This is why a level is better treated as a zone than a precise line. The exact price where orders sit varies between brokers and between participants.
Because orders cluster around levels, price often moves quickly through them. Spreads can widen at those moments. A stop placed exactly on a level may be filled at a worse price than you set. That is a risk you manage by placing stops beyond the level, not on it.
Three touches at 0.6640 and a stop at 0.6620
| Step | Amount | Note |
|---|---|---|
| Level price | 0.6640 | the price where price turned three times |
| Fourth touch entry | 0.6640 | the same level, tested again |
| Stop price | 0.6620 | placed below the level, not on it |
| Distance from entry to stop | 0.0020 | 0.6640 minus 0.6620 |
| Distance in pips | 20 pips | 0.0020 divided by 0.0001 |
| Position size | 0.10 standard lots | one tenth of a standard lot |
| Pip value at 0.10 lots | A$1.51 | A$15.06 per pip on one lot, divided by 10 |
| Risk on the trade | A$30.12 | 20 pips multiplied by A$1.51 |
Brokers vary in how they round pip values and in the spread they quote. Some also charge a commission. Check the contract specifications before you calculate.
Doing it once, step by step
In these steps you will mark a trend and a level on a chart, then plan a trade with a stop placed beyond the level. Do the steps in order on a demo chart of AUD/USD.
- 01
Open a daily chart of AUD/USD
Set the chart to daily candles. Look at the last six months. Find the highest high and the lowest low. Note whether price is making higher highs and higher lows, or lower highs and lower lows.
- 02
Mark two swing highs and two swing lows
A swing high is a candle with lower highs on both sides. A swing low is a candle with higher lows on both sides. Mark the most recent two of each. These points show where price turned before.
- 03
Draw a horizontal line at the most-touched price
Find a price where at least three candles have touched and turned. Draw a line across the chart at that price. If the touches are spread over a few pips, draw a zone instead of a line. For example, a zone from 0.6635 to 0.6645.
- 04
Check the trend on a shorter time frame
Switch to a one-hour chart. See if the trend agrees with the daily chart. If it does not, note that the market is mixed. You can still trade, but you are trading against one of the two trends.
- 05
Plan a stop beyond the level
Suppose price touches your level at 0.6640 and you buy. Place a stop 20 pips away, at 0.6620. At 0.6640, one pip on one standard lot is about A$15.06. On 0.10 lots, 20 pips is about A$30.12.
- 06
Size the position to your risk in A$
Decide the maximum you are willing to lose on the trade, for example A$30. Divide that by the pip distance of 20, giving A$1.50 per pip. Divide A$1.50 by A$15.06 per pip on one standard lot, giving about 0.10 lots. Check your broker's contract specifications, because pip value rounding and commissions vary.
The mistake most people make here
The common mistake is to place the stop exactly on the level, at 0.6640. Price often moves a little past a level before turning, so a stop on the line can be hit while the idea is still valid. A better habit is to place the stop a clear distance beyond the level, such as 20 pips away, and then size the position so the risk in A$ is an amount you chose in advance. With 0.10 lots, 20 pips is A$30.12. If that is too much, use a smaller size rather than a tighter stop.Check yourself
Price touches 0.6640 three times. On the fourth touch you buy at 0.6640 with a stop at 0.6620. How many pips is the stop, and what is the risk on 0.20 standard lots?
The distance is 0.6640 minus 0.6620, which is 0.0020, or 20 pips. One pip on one standard lot is 10 units of the quote currency, about A$15.06 at 0.6640. On 0.20 lots that is A$3.01 per pip. 20 pips multiplied by A$3.01 is A$60.24.
If you wanted to risk about A$30 on the same 20-pip stop, what position size would you use?
A$30 divided by 20 pips is A$1.50 per pip. At about A$15.06 per pip on one standard lot, A$1.50 is roughly 0.10 standard lots.
Questions that come up next
What does a level on a chart actually show me?
A level is a price area where price has turned before. It is not a line drawn by an exchange or a rule price must follow. It marks a place where many buy and sell orders were placed in the past. Those orders can slow a move or reverse it, but they can also be overwhelmed.
How many touches make a level worth watching?
Two touches are a hint that the area matters. Three or more touches suggest that many participants are watching that price. More touches do not make the level certain to hold. They only show that the area has changed the balance of buyers and sellers before.
Why does price sometimes move past a level before turning?
Orders cluster around a level rather than sitting on one exact price. Buyers may place limit orders just above support, and sellers may place stops just below it. A small push past the level can trigger those stops and create a fast move. The turn, if it comes, may happen a little beyond the line you drew.
What happens when a level breaks?
When price closes clearly beyond a level, the old level often changes role. A broken resistance can later act as support. A broken support can later act as resistance. This is a common pattern rather than a law, and it can fail.
How do I place a stop when a level is nearby?
Place the stop a clear distance beyond the level, not on the line itself. Then choose a position size so the risk in A$ is an amount you decided before entering. If the risk is too large, use a smaller size instead of a tighter stop. Brokers vary in how they round pip values and in the spread they quote, so check the contract specifications first.
Does a level tell me where price will go next?
No. A level shows where price has turned before and where orders tend to sit. It does not predict the next move. Treat it as one piece of information, not a signal. The outcome depends on how much buying or selling arrives at that area.
The words used on this page
- trend
- The general direction price has moved over a period you choose. An uptrend is a sequence of higher highs and higher lows. A downtrend is a sequence of lower highs and lower lows.
- support
- A price area where falls have stopped before. Buy orders tend to sit just above it. It is a zone, not a precise line.
- resistance
- A price area where rises have stopped before. Sell orders tend to sit just below it. Like support, it is a zone rather than a line.
- range-bound
- A market that is neither trending up nor down. Price moves sideways between two areas. Neither higher highs nor lower lows hold.
- pip
- A small unit of price movement. On AUD/USD around 0.6640, one pip is 0.0001. On one standard lot of 100,000 units, one pip is worth 10 units of the quote currency, the US dollar, so the value in A$ depends on the AUD/USD rate.
- stop-loss
- An order that closes a position at a chosen price to limit loss. It sits beyond the level you are watching, not on it. Brokers vary in how they fill stops when price moves quickly.
What to take away
- A trend is the direction price has moved over a period you choose, read from higher highs and higher lows or the reverse.
- Support and resistance are zones where orders have clustered before, not lines price must obey.
- Price can move a little past a level before turning, so place stops a clear distance beyond it and size the position to a risk you chose in advance.
- A broken level often changes role, but this is a common pattern rather than a rule, and brokers vary in rounding and spreads.