Reviewing the previous section on trends, you can broadly define an uptrend as a series of higher peaks and higher troughs. Now apply this reasoning to the chart below.

The first marked trough is lower than the previous trough, so you then need to wait for the next series of peaks and troughs to confirm the trend pattern. By this time though, the stock has increased in value by 20%. The confirmation pattern has come well into the trend. To overcome this, we use the second weapon in a trader’s arsenal, support and resistance.

Support – This is a price that the market supports and will not let it go below. When price declines and approaches this level, buyers consider it good value and purchase stock. Many investors look for oversold stocks and react to these conditions. This is the support level for that stock at that time.

Resistance – This is the price that the market will not let it rise above today. As it approaches that price, sellers will consider it to be overbought and sell out to take a profit. This is the resistance level for that stock at that time.
How do you draw support and resistance lines? You should remember from the previous section that a trend is made up of peaks and troughs. The peaks are the points of resistance where no one was prepared to pay a higher price for that stock on that day. The troughs are the points of support where buyers were happy to buy the stock. Drawing support and resistance lines is a process of lining up these peaks and troughs. The more peaks or troughs you can draw through, the more of interest a line is.