Drawing 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.
For this example, we'll use Toyota Motors, symbol TM.
Let's start with a basic trendline.
Sometimes, it's tough to see the trend initially.
Trendlines really help make the trend clear.
They're also used to draw support and resistance.
In paperMoney, there are several ways to add a drawing.
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.
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 sell-off followed.
The last drawing tool I'll demonstrate
is the Fibonacci retracement.
Technicians generally use this tool
when they have 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 observe 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.
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.
Once a bounce occurs,
we could consider it an entry signal.
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.
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.