This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Technical Primer: Why Trend Line Support Matters

BALTIMORE (Stockpickr) -- There are few investing topics as controversial as technical analysis. Dismissed by some as "tea leaf reading" and paraded by others as a technique with incredible profit potential, technical analysis has its fair share of both fans and opponents. For those looking to add fuel to their portfolios with this increasingly popular system, it's important to understand how technical analysis works.

Simply put, technical analysis is the practice of examining stock charts to determine a stock's future price movements. Since technicals burst on the Wall Street scene in the 1980s (after being developed for commodities merchants in Europe and Japan in the 17th and 18th centuries), they've been one of the most difficult topics for traditionally trained financial professionals to grasp. After all, the idea that you can simply look at a stock chart to predict the future comes at odds with the fundamentals-based investing models that classical economists devoted their lives to.

But many of us have come to terms with the impact of technicals on the market today, because technical analysis is less about mystically predicting the future than it is about developing trading expectations based on investor psychology and trading mechanics.

Some of Wall Street's most successful hedge fund managers use technicals either exclusively or in conjunction with their fundamental stock analysis. And the top tier of small-time traders can often produce successful trades as much as 90% of the time. That factor alone makes technicals worth paying attention to.

Today, let's take an in-depth look at trend line support, one of the keystones of technical analysis, and explore how it can help you bank extra trading profits.

Support, one of the biggest concepts in technical analysis, essentially is an area that a stock's share price has difficulty moving below -- a sort of price floor (the opposite of support is known as resistance). Support is significant because it provides traders with insight on when to pull the trigger on a trade as well as how to minimize downside risk.

Since stocks are at a short-term low when they reach their support levels, buying stocks at support provides an investor with lower entry prices and potentially higher profits. And since support is a sort of "price floor" for a stock, placing stop losses right below support helps mitigate risk when a stock makes a high-percentage fall through that floor (something known as a breakdown).

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,912.11 -70.48 -0.42%
S&P 500 1,969.95 -8.96 -0.45%
NASDAQ 4,442.6980 -2.2110 -0.05%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs