Trading: Support and Resistance

Support and resistance are concepts in technical analysis of trading. Understanding these and how to use them is vital to improving profits.

Technical analysis is the process of evaluating a stock market. This looks at how prices fair in comparison to historical prices. Also compared are prices of other similar markets found on exchanges.

This can be complex but has been assisted by the use of technology. Technical analysis is vital in locating resistance and support levels.

A resistance is a level which a stock has not been able to pass. Stock prices on exchanges increase and decrease on a daily basis. A resistance is identified by the price increasing several times.

A resistance level is set when the price hits this level many times. The price hits this resistance level, but never can pass this mark. This price is referred to as the ceiling as it cannot increase.

A support level is the same concept but is on declining prices. A market price is declining but never falls below the lowest price. When this happens with declining prices a support level has been set.

A level of support may coincide with a good buying opportunity. The reason is the price probably will not fall below the support. It is very important to identify support and resistance levels.

Trading Support and Resistance Levels

In trading these, the validity of the levels must first be found. Validity means that the support and resistance levels are true. This is proven by looking at the times the price hits the level.

If the price hits it two or more times this indicates a valid level. The more times the price reaches the level, the stronger support. There are a few ways of trading support and resistance levels.

If the prediction is the resistance level will hold, then wait. The trader should wait for the price to fluctuate down or decrease. Traders buy as the prediction is a rise back to the resistance level.

After the trader buys, the trader waits for it to hit the resistance. Once it increases back to the resistance, sell and take the profits.

Shorting the Stocks

The other way to trade a support level is to short the stock. With an identified support level a trader waits for an increase. After the price increases a trader will then short the stocks.

Once the price falls back, the trader will buy the stocks back. The trader returns them to the broker who loaned them to the trader. The trader pockets the difference made from the buy and sell price.

Trading support and resistance levels is not extremely high risk. This is true as long as a trader understands how to trade the levels. This type of trading definitely requires knowledge and experience.

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