lines often act as resistance lines for prices. As long as you
the trend line properly, you can see why it has this
name. You expect the line to 'resist' price movements beyond
it. Said otherwise, a resistance line exists when traders
prevent prices from rising above a certain point.
Since resistance is the mirror image of support, you can
simply reverse strategies based on support lines to generate
similar strategies using resistance lines. The 3-Touch
Support strategy, for instance, can be reversed to
produce a mirror 3-Touch Resistance strategy. To keep this
discussion fresh, we'll leave the exact details of this
reversal to you. We'll focus instead on some special
considerations that arise when traders use resistance lines to
enter and exit trades.
The Significance of Resistance Lines
resistance line is a line drawn along a series of daily high
price points where buyers resist buying more. The price is
simply too high for them. At these points, the expectation is
that sellers will emerge at the resistance line to take
As a trader, you should care about resistance lines even if
all you ever do is buy stocks first, then sell them later.
True, as a buyer, the support line is your main focus. When
prices dip below the support line, it usually signals that it
is time to sell.
But remember what swing trading is all about. Stock prices
rise and fall in (hopefully) predictably patterns or cycles.
As a buyer, you want to buy at the lowest possible price. That
means getting in just as the stock is about to rise. That also
means looking for signals that a downtrend is about to reverse
course to become a new uptrend.
Hence, the buyer should also care about identifying downtrends
using resistance lines because, when the downtrend ends, the
next move may very well be an uptrend. So if you want to get
in on the action as early as possible, you need to observe
when a downtrend breaks to the upside. A breakout
is a potentially powerful signal that an uptrend may be
starting and that you should pay attention.
It goes without saying that if you plan to sell short, paying
attention to downtrends and resistance lines is critical.
Selling short is inherently more risky: you sell a financial
instrument first and then buy it back later at a lower price.
But since prices theoretically have unlimited upward potential
(while limited to the downside at $0), selling short is not a
transaction one should rush into willy-nilly.
However, if you strive, as you should, to be emotionally
neutral about whether prices rise or fall, why shouldn't you
try to profit in both directions? To profit only on price
gains is to miss out on 50% of the opportunity presented by
trend-based trading. Commodity
traders know this well. They tend to be more familiar with
this practice than stock traders.
Consider the following chart:
ALXN stock chart with entry on 3rd touch of support line,
and exit at break of support line.
This stock is in an obvious downtrend and offers an opportunity for short selling.
As can be seen, its downward sloping trend line acts as a
resistance line for over two months.
Entry and Exit
to the 3-touch resistance
strategy, you are to sell (short) financial
instruments right after the third touch of prices to the
resistance line, and buy (close out the short position) when
resistance is broken to the upside.
With ALXN, this means selling the stock after Aug. 5 and
buying it back once prices breach the resistance line on Oct.
Here's another chart:
LVLT stock chart with two entry points on 3rd touch of
two separate support lines, and exit at break of second
Generally speaking, trend lines with shallow slopes are much
more risky to use than those with steeper slopes. Mentally
subtract the top trend line so you can more clearly see how
the prices beneath it are almost moving in a horizontal
fashion. Almost. The
trend line may be shallow, but it is nevertheless downward
A trader willing to take on the greater risk would, following
the 3-touch resistance strategy, short this stock when prices
retest the resistance line for the third time on Jun. 11. The
gamble pays off: in July, the stock's price begins a
precipitous decline. It never returns to this resistance line.
Instead, the opportunity arises to draw a new resistance line,
this time with a much steeper slope.
The experienced trader would see this new line as an
opportunity to increase his short position. With a new trend
in play, the trader following this strategy would wait for a
new third touch of prices. This occurs on Sep. 9.
Unfortunately, six trading days later the resistance line is
tested for the sixth and final time. Resistance fails. The
trader would immediately cover his most recent short position,
most likely breaking even or at a slight loss. But there is
also the first short position which, if covered, would bring
him in a tidy profit. The prudent thing to do would be to sell
at this time as well. Since the slope of the first resistance
line is slight, a quick rise in price with a breach of that
line would not be nearly as profitable to the trader.
logic for using resistance lines for trading is the same as
for support lines, only in reverse. The more times daily highs
touch the resistance line but fail to cross it, the more
confidence you can have that it accurately reflects the trend.
Such tests of resistance encourage sellers of the stock to
sell more after the price passes the test. Using terms from
economics, fresh selling constitutes supply of stock and is
called distribution. Owners of the stock are reluctant to hold
it after the resistance line resisted the effort by traders to
break above it. They are willing to sell their inventory of
stock at increasingly lower prices.
In sum, using resistance and support exemplifies the main
principle of trend-based trading: never enter at the absolute
high, and never exit at the absolute low. The goal is to
capture a sizable portion of the prevailing trend. Keep in
mind that you will rarely profit from all of it. Since you
cannot accurately predict when a trend will begin or end, you
should more modestly shoot for the middle third of the move.