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Chapter 12. Trends—The Basics > Determining a Trading Range

Determining a Trading Range

Trading ranges (or sideways trends) occur when peaks and troughs appear roughly at similar levels. The peaks cluster at a certain price level, and the troughs cluster at a certain price level below the peaks. The configuration usually occurs after a larger trend has come to a temporary halt. A trading range also is called a consolidation or congestion area or a rectangle formation. Charles Dow called very small lateral patterns a line formation and using it in the Dow Jones Averages had very specific rules by which the averages had to abide for that designation. William Hamilton, Dow’s successor editor at the Wall Street Journal, thought the line formation was the only price formation with any predictive power.

What Is Support and Resistance?

When prices have been rising and then reverse downward, the highest point in the rise, the peak, is referred to as a resistance point, a level at which the advance has met with selling “resistance.” It is the level at which sellers are as powerful and aggressive as the buyers and halt the advance. When the sellers (supply) become more powerful and aggressive than the buyers (demand), the result is a subsequent price decline from the peak. A resistance level becomes a resistance zone when more than one resistance level occurs at roughly the same price. Prices rarely rise and stop at exactly the same level. A single, high-volume, price peak often defines a resistance point, but even then, because the high volume, especially if it is preceded by a sharp price rise, is a sign of speculation and emotion, and the price where large sellers actually begin to enter the market is unclear.


  

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