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You may have heard the expression “The stock is trading at support levels.” Or “The stock is approaching resistance.” You’ve probably wondered how do you find these support and resistance levels and how can you use these levels to help you in your quest for trading or investing success.
So what is support? Different definitions can be found on the web. Wikipedia defines support “The support level is the lowest price a security trades at, over a period of time. The longer the price stays at a particular level, the stronger the support at that level. Some traders believe that the stronger the support at a given level, the less likely it will break below that level in the future.” It is the level where the buyers usually come in and sellers dry out.
So why is this important to understand and recognize on each security you plan to trade or invest in? Without a doubt you have heard people mention that in order to be successful in investing and trading, you need to buy low and sell high. You buy at support levels, and then sell as the stock approaches resistance.
Alright, now that we talked about what support is, why is it important to recognize it on a chart, let’s discuss a bit where can you find support levels on a stock. Support is always BELOW the current price. If the stock drops below its support levels, then that support will become resistance which we will discuss in more detail below.
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Ok now that you know what support is, you know the importance of spotting it, and where to find the support, the real question is when do you buy the stock? That is a question which can be different for everyone. There is really no “one answer fits all” analogy here. It all depends on your personal investing or trading style. If you are a bit more aggressive trader, you may want to buy the stock just before it hits the support levels and wait for that support to be hit. Others may wait for the stock to hit support and see if it holds, and then buy the stock. Regardless of which style of trading you fall in, watch for one important thing – the volume. You want to see lower volume on down days, and more volume on up days.
Now that we know what the definition of support is, let’s discuss what resistance is. Resistance is defined as the level of price at which the selling is thought to be strong enough which would prevent the stock from going higher. Usually, if you look at a chart you will notice that at these levels there were at least two other attempts to break above, and have failed.
Understanding where the resistance is located is very important. It will help you avoid buying right where the sellers are, and therefore avoid suffering loses.
If you are long on a stock, meaning if you have already purchased the stock at support levels, when do you sell it or even sell it short, which is a way to make money when the stock goes down. As with support it depends on the type of investor you are. If you are aggressive, you do so as it approaches those levels. If you are a bit more cautious or passive investor you may want to wait and see if it will break those levels. Again watch the volumes, and let that be your guide.
Support
Resistance
Support and Resistance levels
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