The technical analysis tool of speed lines was developed by Edson Gould, a technical analyst who became quite well known for making several accurate stock market calls during the 1960s and 1970s. They are sometimes referred to as “speed resistance lines”, however, that moniker is somewhat misleading since the lines are designed to represent both support and resistance levels.
Understanding Speed Lines
Speed lines are what is known as a fan tool – one that reveals multiple potential support or resistance trend line levels – similar to the Fibonacci fan or Gann fan. Each of the three lines that comprise this indicator shows possible support (in an uptrend) or resistance (in a downtrend) levels that may serve as future turning points for a security’s price.
How to Draw Speed Lines
Although you can simply apply a speed lines indicator to a chart, speed lines are also easy to draw yourself.
The first speed line in an uptrend is drawn from the low price point, or start, of the uptrend to the most recent high price reached in the trend. The second line, which is known as the 1/3 line, is then drawn from the low price to the price point that represents a one-third retracement from the high toward the low. The third line, the 2/3 line, is drawn from the low to the price level that represents a two-thirds retracement from the high.
For example, if a stock advanced over a period of time from $10 a share to a high of $50 a share, then speed lines would be drawn as follows:
The first speed line would be drawn from the $10 low price level to the $50 high.
The 1/3 line would be drawn from the $10 low to the $37 level. (The total advance of the stock is $50 – $10 = $40. One-third of $40 is approximately $13. $50 – $13 = $37.)
The 2/3 line would be drawn from the $10 low to the $24 level. (Two-thirds of $40 is approximately $26. $50 – $26 = $24.)
Both the 1/3 and 2/3 lines are essentially trendlines that indicate possible support levels in the event of a downside corrective retracement during an overall uptrend.
Applying speed lines to a downtrend, the first line is drawn from the recent high price the downtrend began from to the most recent low of the downtrend. The 1/3 line would be drawn to represent a one-third upward retracement of the downtrend, and the 2/3 line to represent a two-thirds retracement of the downtrend.
Speed lines can be redrawn in the event that a market makes a new, higher high or lower low.
Using Speed Lines
In an uptrend, when a downside retracement occurs, a trader looking for a price point to buy into the market based on a belief that the overall uptrend will resume following some corrective downside price movement may use speed lines to identify potential support levels at which to consider buying.
Speed lines are not intended to be used as standalone technical indicator. Rather, they are designed to identify price levels where traders can use other technical indicators to study price action – such as candlestick patterns – in order to determine if the market does indeed appear to be finding support and consolidation, or if price action shows the market likely to fall further.
If price falls below the 1/3 line, the next level to look for support to form is at the 2/3 line. If price finds support and begins moving upward again from the 2/3 line, both the 1/3 speed line and the first speed line (drawn from the low to the high) may act as resistance levels for the resumed uptrend and potential trend reversal points.
If price continues to fall below the 2/3 line, this is interpreted as meaning that the uptrend is no longer valid, that the market has transitioned from an uptrend to a downtrend. A trader can then construct a new set of speed lines applied to the downtrend.
In a downtrend, the 1/3 and 2/3 speed lines represent potential resistance levels from which the market may turn back to the downside after an upside corrective retracement.
Adding a Fourth Line
Although it is not part of the speed lines calculation, many traders will also draw a fourth potential support/resistance trendline at the 50% retracement level of an uptrend or downtrend. This is because 50% retracements of long-term trends have been shown to commonly occur. A 50% retracement line will fall between the 1/3 and 2/3 speed lines.
When Speed Lines are Most Helpful
Speed lines are used to help traders and analysts determine probable support or resistance levels within an overall trend. They can be applied across various time frames, such as hourly, daily, or weekly, but they are not designed for use when a security is in a ranging, non-trending market. By using different time frames, traders or analysts can apply speed lines to short-term, medium-term, and long-term trends.
Speed lines are most useful when applied to securities that are trading in a long-term, well-defined trend and whose trading is not typically characterized by high volatility. Speed lines are generally less useful when applied to securities characterized by choppy or extremely volatile trading.