Online Investing Hacks

Support and Resistance

Knowing how to recognize and profit from levels of support and resistance can improve your trading success.

In trading, supply and demand is easy to spot. As the price of a stock or other investment drops, it reaches a price at which enough traders and investors are willing to buy, and its price stops falling and even starts to head back up as the buying starts. Conversely, as the price of a stock or investment increases, it reaches a price at which no trader or investor is willing to buy, and the excess supply of stock causes the price to stop increasing and head back down. By learning to identify levels of support and resistance and by understanding the implications when those levels are broken, you can improve the results of both your technical trading and your fundamental analysis investing.

An old saying in technical analysis circles is “Stocks don’t have memory, but people do.” People’s memories, not to mention psychology, generate levels of support and resistance. For example, many people who buy and sell stocks can’t stomach losing money on an investment. Although it would be better to sell a losing trade and invest the proceeds in a more profitable endeavor, these people hang on to their stock until it reaches their original purchase price and only then do they sell. That original purchase price is one form of resistance. Similarly, a company might have a well-known buy price, whether it’s based on the dividend the company pays, a previous low, or ...