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Why Price Support Matters: Technical Analysis 101

BALTIMORE (Stockpickr) -- Everybody knows that all you need to do to make money in the stock market is "buy low and sell high," right?

Ha. If only it were that easy.

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While that may not be the most actionable investment wisdom, it does identify what you should be focusing on. If you know how to spot price floors and ceilings, then you're better-equipped to make money in these markets than the vast majority of investors. Today, let's focus on the first part: buying low.

To do that, we're taking a closer look at how stocks find support, one of the keystones of technical analysis. How can different types of price support help you bank extra trading profits?

Support is one of the biggest concepts in technical analysis. Essentially, support 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).

Support levels rarely appear at arbitrary prices. Instead, investor psychology and trading mechanics tend to drive this impressive chart phenomenon. Because of that, we have some tools we can use to spot it.

First, it's important not to discount psychology. Support levels frequently occur at price levels where high-volume buying took place. That's because when a stock slides down to a price at which many investors bought, investors who felt that those levels were attractive prices originally will often re-up their positions en masse, adding bullish pressure to the stock's price and halting the slide at a technical support level. Psychology can impact a stock at seemingly random price levels too. When the S&P 500 falls down to a major round number such as 1,000, investors often cool their selling pressure.

Trading mechanics too play an equally significant role. Automatic trade orders (such as stop losses) at particular levels can create floors and ceilings for stock prices -- and frankly, so can the increasing popularity of technical analysis. As scores of new traders pick up technicals, the practice can become a self-fulfilling prophecy.

With all of that in mind, here's a look at a few different kinds of support levels worth watching for.

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