To give you some idea of how important support and resistance is in trading when buying or selling stocks I will give you 2 examples:
- Many novice traders see their stocks going down and they sell their stocks and moments after that, the stock bounces of a resistance level and goes back up.
- When a stock encounters some very solid resistance the price of the stock can go down and when you are holding this stock, your profits will decrease.
When you look at the chart of Coca-Cola you will see that I have drawn a line where the first part is called resistance, and later when prices go through this line, it is called support.
When you look closely at the chart you can see that prices do not get through resistance (gray line) until June.
Resistance is a price level where the selling is greater than the buying so prices do not go up any further or traders believe that at that point the price is getting overpriced and start taking profits.
The more times that resistance level is tested the stronger the resistance level becomes. You can see that this resistance is not taken out in 8 months.
You can also see that in June that the resistance level is successfully penetrated and at that time the resistance level becomes a support level. This is not always the case, you can also have false break outs where prices break out and after a while prices return below the resistance level.
When you look at the chart you will see that I have drawn a line that is called support from June going onwards.
At a support level, the prices are likely going to bounce up. There are more buyers than sellers or the price at that point is thought to be worthwhile so traders start buying.
The more times that support level is tested the stronger the support level becomes.
If the support level is successfully penetrated this support level becomes a resistance level. This is not always, you can also have false break outs where prices break out and after a while prices return below the resistance level.
Buy stocks where it is most likely that buyers get into the stock and sell where it is most likely that sellers get into the stock.
Always analyze the support and resistance levels in a chart of a stock before you buy or sell.
Let us say that you found a stock that you think is in an uptrend and you bought the stock. Moments after that, the stock bounces of against a resistance level and starts going down. I think you do not want that to happen? I surely don’t want that, so do your analysis.
Links of interest
- Register for all the latest Trader’s Blog postings Today.
- Free Email Trading Course Copy
- Seven free market lessons guaranteed to improve your trading