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Support and Resistance Trading

By Alfred Fernandes | March 3, 2009


What is Support and Resistance Trading?

The Stock Trading taking into consideration the historic Price Support and Resistance Levels observed on technical charts is called Support and Resistance Trading. So let us find out what are the Support and Resistance Levels.

What Are Support and Resistance Levels?

A Support Level is a price level where the price tends to find support as it goes down in a correction move. This means the price is more likely to rebound off this level rather than breaking down below it. However, if the price has breaches this level, by an amount exceeding some percentage, it is likely to continue going further down until it finds another support level.

PaychexSupportResistanceChart

A Resistance Level is the opposite of a support level. It is where the price tends to find resistance as it is goes up. This means the price is more likely to rebound back off this level rather than breaking out above it. However, once the price has surpasses this level, by an amount exceeding some percentage, it is likely that it will continue rising further until it finds another resistance level.

Support Levels indicate the price level where the majority of investors expect that prices will move higher. The Resistance Levels indicate the price at which a majority of investors feel that prices will move lower. In fact these Support and Resistance Levels are governed by the supply and demand of stocks in the stock market.

How To Identify Support and Resistance Levels?

732px-OracleSupportResistanceTrendLineChartSupport and resistance levels can be observed by drawing trend lines on a technical chart.  To draw a technical chart you’ll require a Technical Analysis Software.  There are several softwares, but selecting a Good Technical Analysis Software is crucial to better Stock Trading success.  The more times a support/resistance level is “tested” (touched and rebound off by price), the more significance given to that specific level.

If a price breaks down a support level, that support level often becomes a new resistance level. The opposite is true as well, if price breaks out a resistance level, that resistance level will become the support level in the future.

Effective Support and Resistance Levels Trading

Often the price moves in a narrow range in between Support and Resistance levels. This is also Support and Resistance Levels Tradingcalled Range Trading which occurs when there is no good trend move. Here the trend following indicators don’t work and we have to use fast oscillators like RSI and Stochastics to initiate successful trades.

When the trend is good the prices move in wider ranges. If the trend is up the up moves will be larger and the corrective moves shorter rebounding back from the first support level or a supportive retracement levels which are also technically termed as Fibonacci Levels which could be 38 to 50% of the previous up move. When the trend is good we can follow indicators like Moving Averages and MACD to initiate effective winning trades. When the trend is up always buy on corrective moves which come down and select the support level to enter long trade or buy position. If the support level determined by the trend lines coincides with the Fibonacci 38 or 50% Retracement Level then it becomes multiple support levels where shrewd and expert traders initiate their buy positions.

Easily Be A Support and Resistance Trading Master

Topics: Market Trend, Stock Trend, Stocks Investment, Technical Stock Analysis, Trend | No Comments »

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