Support and Resistance
The Key to Making Profits
and Protecting Profits
The concept of support and resistance is an extremely important part in trading or investing. Once you learn it, you will be able to determine a good entry point as well as a possible exit point.
When you are able to do so, your trading or investing will be so much better.
Professionals are always on the lookout for support and resistance. Learn to do the same.
Professional traders and investors always keep an eye on the support areas and resistance areas of a stock or index. Why do they do that?
The reason why they do so is because it is key to making profits as well as protecting their existing profits. When I trade, support and resistance is one of the first things I will look at.
In just a few seconds, I will know whether I have a chance at making money or not. Don't worry, it is not complicated. Once you finish reading this article, you will also know whether it is good or not to enter the stock. The few seconds of looking at the stock chart acts as a filter to filter out bad candidates.
Combine this concept with the other concepts and you will have a solid strategy to make consistent profits from the markets. I will teach you how to combine it in the Strategies section as well as the Combination power section.
A simple concept but a very important one
As you will see, the concept of support and resistance is a simple one. Once you learn it, you will understand the basic premise underlying market moves.
If you remember from the previous article, supply and demand plays an important role in support and resistance. To recap, when there is great demand of something, the price of that thing will go up. When there is a lot of supply, the price of that thing will naturally go down.
With that in mind, you are ready to learn about it.
Here is what support and resistance means...
Support is an area where the price of the stock stops to go down. This is the level in which demand is stong enough to prevent the stock price from falling any further.
Resistance on the other hand is an area where the price of the stock stops to go up. This is the level in which supply is strong enough to prevent the stock price from rising any further.
Take a look at the chart above. The bottom horizontal line is where support is. Everytime the stock price reaches that area(blue circle), it bounces off support and rise again.
The top horizontal line is where resistance is. Everytime the stock price reaches that area(orange cicle), it then falls again.
Now, this does not mean that the stock will forever bounce off support and falls when it reaches resistance. You want to be aware of where the support is to know a possible place to enter. Similarly, you want to be aware of where the resistance is so you will avoid buying the stock at that area.
See how this simple concept can help you pinpoint a better entry place as well as an exit place? There are many more uses of this concept.
From here, it may start to be a bit confusing. Don't worry, take the time to understand these other concepts. Read it again and again till you get it. This understanding will richly reward you in the future.
Let's explore some of the rest...
A break below support signals price may go down further-so, protect yourself
Support will not hold the stock forever. At some point in time, the stock can drop below support. A drop below support signals that the price may go down further.
When the stock price drops below support, it indicates a new willingness to sell the stock. Imagine what goes on in the mind of the owners of the stock. They hope that the stock will go up in price, however, it drops instead. Thus, they will have a lower expectation of that stock and they will be more willing to sell at even lower prices.
Some people are already losing a lot of money when the stock drops below support. So, they may want to sell the stock to salvage some of their money. Others are also experienceing fear and panic.
All the above factors will make the stock price drop further. So remember, a break below support signals price may go down further. What does that mean? Protect yourself. Don't go and buy the stock now. Wait for a better time.
Support Sometimes Becomes Resistance
Sounds confusing right? This is one area that many find it difficult to grasp. I'll try my best to explain it as simple as possible.
As I said, the price of the stock will not bounce off support forever. What that means is, there will come a time when the support area can no longer keep the price from falling further.
When this happens, we call that 'breaking support'. A stock that breaks support can fall dramatically. It may later try to go up again. However, when it goes up, it will meet with resistance when it reaches the old support.
Take a look at the chart above. The old support is around 43$. In the middle of March, the stock fell below the support. Later, the price of the stock rose again. However, when the stock price reaches around 43$ which is the old support, it falls down again. So you see, the old support becomes a resistance.
You may be wondering why that happens. I want you to picture this. Imagine someone who bought a thousand shares of the stock at 43$ in the beginning of March. That person hopes that the stock will go up in price so he can make some money. To his horror instead of going up, the price of the stock went down to 32$.
What a shock he or she must have experienced. Guess what he or she will be thinking? Well, he thinks to himself "The next time this stock goes up again to my original price of 43$, I will sell it. At least I will get some of my money back".
So, when the price of the stock later rises back to 43$, guess what will happen? Yes, a whole group of people who bought at 43$ will try to sell it. That unanimous action will make the price of the stock drop.
A break above resistance signals that price may go up further-get ready to make some money
Resistance will not always keep a stock price from going higher. When a break above resistance occurs, it indicates that there is a new willingness to buy. The expectations of market players have increased and they are willing to buy at even higher prices.
This is a great time to enter a stock. This is especially so, if the stock price is making a new high for the first time. Many investors and traders like to buy a stock when it breaks above a resistance and establishes a new high.
When a stock breaks above a resistance, there is a great chance that it will go up further. It is the same with life. On our road to achieving success, there are always obstacles and resistance. Once a person overcomes the obstacles, he or she will be able to go to greater heights.
The same is true with a stock. When it breaks above resistance, there is a great possibility it will rise to greater heights.
Resistance can become support
This is the opposite of 'support can become resistance' which we discussed above. By now you would have guessed that support can become resistance and resistance can become support. That is one of the amazing things about support and resistance.
As mentioned, the price of the stock will not stop at resistance forever. There will come a time when the resistance area cannot keep the price from going higher.
When that happens, we call that a 'breakout'. A stock that breaks out can rise dramatically. It may later go down again. However, when it goes down, it will meet with support when it reaches the old resistance.
Take a look at the chart above. The old resistance is around 280$. In early April, the stock broke above the resistance. A few days later, the price of the stock went down again.
However, when the stock price reaches around 280$ which is the old resistance, it bounces off the support and rose again. So you see, the old resistance becomes a support.
In July the stock price once again drop down to around 280$. However, when it reaches that area, the stock bounces off support and rose again.
Support and resistance forms the foundation for every investing and trading decision
As you can see, support and resistance is indeed a very important concept in stocks. Whether you invest or trade, it is always wise to look at where the support levels and resistance levels are.
We have covered quite a lot regarding support and resistance. But to be honest, there is a lot more you need to know. In my opinion, knowing what we discussed above is enough to have a profitable strategy when you combine it with the other knowledge in later sections.
If you want to read more about support and resistance, click on the links below.(Coming soon)
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