If you’re going to be a stock charter, you need to understand the basics before you can really get into serious trading. If you don’t do this, you can still make money, but it won’t be the way that you expected. Indeed, if you don’t really take time to study the fundamentals of investing, all you’re really doing is getting lucky. Gambling is fine but there are plenty of casinos that make this a straightforward process. If you want to gamble, you can gamble. But if you want to become a serious investor that has options, you need to start thinking like a serious investor. What do solid traders do? They invest based on logic and data.
This brings us right to today’s topic, which is support and resistance points. Support and resistance goes all the way back to supply and demand — it’s these forces that drive the market, anyway. Demand is all about aggression, being bullish, and buying when it’s favorable, while supply is all about low demand, which in turn is selling and being more bearish. There isn’t a trader alive that’s 100% bull or 100% bear. It’s all about knowing the market.
Support is important, because it’s the level where demand is strong enough to keep the price from going down. The theory that’s accepted by investors today is that as the price goes down towards the support line and gets cheaper, buyers get hungry to buy…and the sellers don’t want to sell. However, once the price hits the actual support, it’s believed that the price won’t drop because demand has overwhelmed supply.
Keep in mind that figuring out where support and resistance lay isn’t precise — there’s going to be some room for error. Price movements tend to be pretty volatile. You’ll find support levels actually below the current price, but there are exceptions to this “rule”, as it were.
Resistance is the opposite of support, where the price is going to be strong enough to keep the price from rising further. So by this logic, we can make an assumption that the price will advance towards resistance, making sellers very eager to sell but buyers will not necessarily want to buy.
What’s the best way to practice looking at support and resistance? Time. Going back and looking at historical data helps.
We’ll cover more on this topic and more during our stock charting series. Be sure to tune in as we help you become a successful trader in virtually no time at all!