Following the trend: Support and Resistance

Buyers and sellers are in a constant tug-o-war in the stock market. Buyers drive the prices of stocks higher, and sellers drive prices lower. If you want to be profitable in your investing when buyers are driving up prices, you need to follow the trend and be a buyer too. If you want to be profitable in your investments when sellers are in control, you need to follow the trend and be a seller too. Seems pretty easy, right?

Well, as with most things, it’s never as easy as it first sounds.

But the good news is most traders can make money when a stock (or market) is trending either up or down. The trick is getting in on the current trend and holding onto your profits when the price of the stock turns around and begins trending in the opposite direction.

Have you ever asked yourself:

"I've made some money on this trade. Is it time to get out?"

or

"This trend has been going for a while. Can I still jump in and make some money?"

If you can accurately identify likely turning points in the trend of a stock and then act on them, you can drastically improve your trading results. In fact, identifying the trend and the levels at which it is likely to reverse is the core purpose of technical analysis.

Support and Resistance: The Foundation of Technical Analysis

Support and resistance levels are price ranges where stocks are likely to stop moving in their current direction and potentially turn around and start moving in the opposite direction.

Support levels are based on past pricing and act like a floor for the price of stock. As the price of a stock drops down to a support level it tends to stop at that point, turn around and move higher.

Resistance levels act like a ceiling for the price of a stock. As the price rises up to a resistance level, it tends to stop, turn around and move lower.

Here’s an example of an up-trending stock that bounced predictably on support and resistance levels over a three-month period.

Up-trending Support and Resistance

Stocks tend to find support and resistance in all types of trends – up, down or sideways. Below are charts showing support and resistance levels on down-trending and sideways moving stocks.

Down-Trending Support and Resistance

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HENRY CHIKE OPENE  - MR.   |2009-02-16 00:56:56 I AM A NOIVES IN THIS FIELD; I LIKE TO LEARN MORE SINCE AM INTERESTED IN INVESTING

orville shupe  - no title   |2009-02-16 13:32:00 I have lost quite a lot of money in the last two years trading EUR/USD. I have been using a fib. system which works pretty well but I always get caught no identifying the trend either getting in too late or staying in to long. I would like to learn how to chart and identify the resistence and support levels as described in your article.

buki   |2009-03-24 08:48:21 am new in dis field, i wud like to learn more

mikky Anios  - Mr.   |2009-06-29 05:38:26 (1) How do I determine the parameter for "Stop Loss" or "take profit" and How do I calculate them. Please show me how with a simple example and calculation. (2) Please clarify on the difference between at Price, market price and entry price.

swadehansen  - Where to set your stop losses   |2009-06-29 06:57:17 Here is an article and video that discuss how you can calculate where to set you stop losses: http://www.learningmarkets.com/index.ph p/200904302062/Stocks/Investing-Basics/determining -where-to-set-a-stop-loss.html

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