Support and Resistance: Technical Analysis Primer
How to Use Support and Resistance
Since support and resistance give a good indication of price barriers for a stock, they're incredibly useful tools to use when making trading decisions. For example, buying at support often means that a trader is getting in at the best price. Likewise, selling at resistance removes many of the risks of a violent reversal. Using support levels to set your stop loss prices is another effective way of managing risk and unloading a stock when it proves unable to follow your technical cues.
Even if you're not actively trading, support and resistance levels can give investors important perspective over their portfolios. If shares of a stock are falling, knowing that a strong resistance level is nearby can save you from selling prematurely.
Inevitably, because the myriad factors that price stocks are constantly changing, support and resistance levels can fail. As with any other technical analysis tool, they provide high probability expectations for a stock's price, not an absolute prediction of the future. For that reason, waiting for confirmation of a "bounce" off of support or resistance is essential. Confirmation can vary depending on trading styles and timeframes, but generally, you can consider a bounce confirmed after a second consecutive bar that moves progressively away from a support or resistance level.While no indicator is a crystal ball for a stock's movement, support and resistance can provide an effective, profitable framework for estimating a stock's behavior. Next week, we'll add to your technical repertoire with another primer that will bring you closer to implementing technical analysis for your portfolio. In the mean time, do you have a burning technical analysis question? Get it answered by heading to Stockpickr Answers. -- Written by Jonas Elmerraji in Baltimore.
Twitter and become a fan on Facebook.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- 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 + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV