Trend, support and market structure

Reading for India · about 4 min

What this cluster is for

This cluster contains 2 different kinds of thing, mixed together, and most teaching never separates them.

Some of it is mechanically real. A price level where a large number of orders sit does affect what happens next, because those orders have to be filled by somebody. A gap is an auction that never took place, which is a fact about the market and not an interpretation of one. A break of structure is an event with a date on it, and 2 people looking at the same chart will agree on when it happened.

Some of it is decoration. A trendline drawn through 2 points is a line you chose, and a different person choosing 2 different points gets a different answer. A ratio taken from a 13th-century number sequence has no known mechanism connecting it to a share price. A named shape acquires its name only after the outcome is known, so the failures are never counted.

The job of these 5 lessons is to make you able to tell which is which, on your own chart, in about 5 minutes. That is a more useful skill than knowing more patterns. Most people who lose money on chart reading do not lack patterns. They lack a way to check whether the pattern they are looking at was visible before the outcome existed.

By the end of this cluster you will be able to:

Tell the difference between a trend, which you can count, and a trendline, which you drew
Say out loud the mechanism behind any level you are about to trade, or decline to trade it
Score your own levels honestly, by fixing the tolerance before you count
See how many unnamed shapes on your chart look exactly like the named ones
Read a gap correctly, which means checking corporate actions, volume and news before interpreting anything

Nothing here names a stock. Everything here should still work in 2036, on a company that does not exist yet.

The reading order

Read these in order the first time. Each one removes an assumption the next one depends on.

Trends, trendlines and market structure — a trend is a countable sequence of highs and lows. A trendline is a drawing on top of it. Only 1 of those 2 things is in the data.
Support, resistance and role reversal — some levels hold because real orders sit there. Most hold only in hindsight. Learn the 4 mechanisms, and refuse any level that has none of them.
Fibonacci retracements and extensions — there is no known mechanism by which 0.618 governs a share price. Here is what the tool actually measures, and why the levels sometimes work anyway.
Reversal chart patterns — every reversal pattern reduces to 2 facts you can already measure. The failures are never named, which is why your sense of the odds is wrong.
Continuation patterns and gaps — a narrowing range predicts the size of the next move and never the direction. A gap is a real event with a real cause, and it is the most information-dense thing on the chart.

The checklist

Every article ends in a test you run on your own chart. Collected here, they are one afternoon's work, and they are worth more than the rest of the cluster.

On any chart before you trade it

Draw your trendline, hide the last 6 months, draw it again from what you would have seen. Compare the 2 lines. (1)
Name the mechanism behind your level: orders, round number, prior structure, or option strike. No mechanism, no trade. (2)
Write your tolerance down before counting how often the level held. 1% for a large stock, 0.5% for an index. (2)
Count held against broke over 2 years, and compare the result against a plain round number nearby. (2)
Put the 38.2%, 50% and 61.8% levels and the nearest round number on the same chart, and measure how far apart they actually are. (3)

Before you believe any pattern

Cover the chart from the break onward. Write what you would have called it on that day, and where your stop would have gone. (4)
Find 3 places on the same chart where the same shape formed and nothing happened. They are always there and they have no name. (4)
Move the anchor of your Fibonacci tool to the next defensible swing and watch every level move. That distance is the size of your own choice. (3)

Once, on a stock you hold

Mark every gap in the last year. (5)
Remove the false ones first: splits, bonus issues, rights issues, large dividends. Those are arithmetic, not gaps. (5)
For each real gap, record the size, whether volume was ordinary or several times normal, and how many days until it filled. (5)
Take your last 5 trades and ask, for each, whether the line or level you used was visible before you entered. Write down the count. (1, 4)

That last item is the one that changes behaviour. Most readers find a number lower than they expected.

India and the United States, equally

Every article covers both markets at the same depth, then says where they differ and what the difference tells you.

The divergences here are real and they change what you should do. Indian stocks have daily price bands, so a level can hold because trading stopped rather than because buyers arrived. Indian markets have a shorter continuous session and more overnight news, so gaps carry a larger share of total movement, and an Indian chart looks choppier than an American chart of the same underlying volatility. American markets reopen after a halt with a wider band, by design. Advice written for one market and applied in the other quietly stops being true, and those sections are where that is spelled out.

A note on what this is not

These lessons are free and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now.

They will not make you confident about chart patterns. Done properly they will make you less confident about most of them, and much more confident about the few that survive. That is the intended outcome, and it is the same goal it has always been: fewer people in the 95%.