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TheStreet Open House

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).

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