Support and Resistance
Because stocks are bought and sold by humans, each security will exhibit a unique personality. When the price of a stock
gets too high, the buyers get a little nervous and start to sell. When the price drops too low, the stock trader becomes
eager to buy. Identifying these levels of buying and selling pressure, called support and resistance, can help determine
the proper place to buy or sell a stock and make a better trade.
How do you tell the difference between support and resistance? Here's an easy way to remember. We walk on the floor,
which supports our weight; so remember the support is at the bottom. If we throw a ball in the air, it hits resistance
at the ceiling and can go no farther; so remember, resistance is at the top.
You'll need a copy of the stock's chart from the last six months, a ruler and a pencil. (You can do this on the computer
if you have access to an electronic chart.) It's easier for beginners to find the support and resistance lines on a line
chart, but more experienced traders can use candlestick charts.
Put your ruler (or a computer line) at the current price on the chart and begin sliding it upward. When your line is
touched by two or three points on the chart, you have identified a resistance level. This is the level where buyers of
the stock begin to feel uncomfortable and often give in to selling pressure.
Put your ruler near the current price and begin to move it lower. When your line is touched by two or three points on
the chart, you have identified a support level. This is a lower level at which the traders start to again get interested
in buying the stock. Once a stock hits a support or resistance level, it can easily bounce and retrace in the opposite
direction. A bullish stock may hit resistance and begin to trade bearish, or vice-versa. After the reversal is confirmed,
a trader might consider getting involved.
Stock Chart Basics
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