Support and Resistance

Have you ever heard of the terms “Support” and “Resistance”? If you’re already trading and using technical analysis to find trades, then this is not breaking news for you. To those who are not aware of what itriptyline.htm’>they are, “Support” and “Resistance” are the two basic indicators that technical analysts use to identify patterns and trends on where the stock price is about to move. Many traders take their cues for entry into an options trade or stock trade using these two indicators that they draw on a price chart.

Essentially, “Support” is defined as the bottom price where a stock or any instrument is trading at a certain point during the defined period. Put simply, if you look at the price chart of an instrument or stock from 23 January 2011 to 2 February 2011, and the lowest price that the stock or instrument was trading was at $10, then you can draw a straight horizontal line on $10 and call it “Support”. To most traders, they believe that the stock is being “supported” at this price and that the traders are not selling the stock any lower than $10 in that period. The support line only gives an indication of what has happened in the last trading sessions, and is no guarantee to be upheld or kept. Hence, if a Support is broken, then the traders are likely to have a bearish view on the stock or instrument.

Support Line (encircled)

Resistance, on the other hand, is the opposite of Support. The top price that a stock or instrument is trading for a specific timeframe determines a level of resistance. It means that for that period, the stock price isn’t bought any more than that price. For example, for the 23Jan2011 to 3Feb2011 period like the example above, if the stock is not trading more than $15, then you can draw a straight horizontal line on it and treat it as a level of resistance. If in the succeeding session the stock price trades above $15, it means it has broken resistance, and therefore, some traders would think that there are bullish tendencies or trend patttern forming for that stock.

Resistance Line (encircled)

Support and Resistance line are just one of the basic things about technical analysis. It does not guarantee the best entry price for an options trade or stock trade, but it give a clue on what are the important price points and where you should position yourself, should one of them be broken. Sign up to Planet Wealth and learn more about these technical indicators which help you become a successful trader.