What it means
Technical analysis studies price charts to find patterns, on the idea that past price behaviour offers clues about the future. Speed resistance lines are attributed to analyst Edson Gould and are one of many chart tools that try to map trends.
To draw them, you find a significant low and the following high, then divide the vertical distance between them into three equal parts. Lines are then drawn from the starting point through the one-third and two-thirds marks and extended forward on the chart.
The theory is that when a price falls back after a rise, it often finds support near the two-thirds line, and if it breaks that, it may fall toward the one-third line. If it falls through both, the trend may have failed.
Used in an uptrend, the lines act as support, and in a downtrend they act as resistance. A price that stays above the upper line suggests strong momentum, while a price that breaks below both suggests the trend has changed direction.
There is no proof that these lines predict prices reliably, and many professionals regard technical tools as supporting evidence rather than hard rules. Drawing the lines also involves judgement about which low and high to use, and different traders may reach different results.
Most users combine the lines with other signals, such as trading volume, moving averages and company news. They also set a stop-loss level in advance so that a failed signal does not become a big loss.
In practice
Real-world examples.
Example
A chart analyst at a brokerage marks a rally from $30 to $60 in a technology stock. When the price pulls back to $50 and bounces, she notes the support at the two-thirds line and tells clients the trend remains healthy. She adds that a close below $50 would weaken the case.
Example
A currency trader sees a pair fall from 1.20 to 1.05 and then bounce. He draws the lines at one-third and two-thirds of the fall and uses them to identify where the bounce might run out of strength. He compares the result with a moving average before placing any trade.
Example
A portfolio manager uses the lines to choose a stop-loss on a position. She places the stop just below the one-third line at $40, which gives the share room to move but limits the loss if the trend fails. A $60 entry with a $40 stop risks $20 a share, which she weighs against her upside target.
Formula
Calculation
One-third line level = low + (high - low) x 1/3
Two-thirds line level = low + (high - low) x 2/3
A share rises from a low of $30 to a high of $60, so the move is 60 - 30 = $30. The one-third level is 30 + (30 x 1/3) = 30 + 10 = $40. The two-thirds level is 30 + (30 x 2/3) = 30 + 20 = $50. If the price later falls from $60 and pauses near $50, a trader using the tool sees support at the two-thirds line, and a break below $50 points to $40 as the next level to watch.Case study
Seen in the real world.
Kestrel Analytics is an illustrative, fictional research boutique that tested speed resistance lines on a set of historical price charts. Its analyst marked 20 major rises and noted how far each pullback went.
In 12 of the 20 cases, the price paused near one of the two lines, and in 8 it did not. The analyst concluded that the lines were helpful in some cases but far from dependable, and that 12 out of 20 was not enough to rely on alone. Because the sample was small and chosen with hindsight, the analyst warned against reading too much into it.
The illustrative firm decided to use the lines only as a reference when other indicators agreed. Clients were told plainly that the tool was a guide to likely price zones and not a forecast. The firm also noted that results may differ for different markets and time frames.
Watch out
Common mistakes.
- Treating the lines as certain levels where price must reverse, when they are only areas of interest, and prices can pass through them with no pause at all.
- Choosing the low and high after the fact to make the lines fit past prices.
- Trading on the lines alone without volume, other indicators or a stop-loss.
Questions
People also ask.
Who developed speed resistance lines?
They are generally attributed to the market analyst Edson Gould.
How are they different from Fibonacci retracements?
Both mark levels within a price move, but speed resistance lines divide it into equal thirds, while Fibonacci tools use ratios such as 38.2%, 50% and 61.8%. The two methods often give similar zones, so some traders use both.
Do they work in a downtrend?
Yes, the same method is used by dividing the fall into thirds, and the lines then act as possible resistance as the price recovers. In that case the low and high are reversed in the calculation.
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