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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.

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Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
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