BALTIMORE (Stockpickr) -- Support and resistance are two technical terms that most investors have probably heard at one time or another. These technical price levels aren't just key tenets of technical analysis; these two simple concepts are also the basis of many of Wall Street's most-successful trading strategies.
Like most analysis concepts, though, it's not enough to understand what support and resistance are. Success comes from knowing how to put it into play.
Today, we'll take a look at how support and resistance works, how to determine these key levels and how to put them to work for your portfolio starting from day one.
Simply put, support and resistance are price levels that stocks have trouble moving beyond. Support acts as a sort of price floor for a stock, while resistance acts as a price ceiling.
Would-be technical analysts can become pretty skilled at picking out support and resistance levels without actually understanding the mechanics of how these price levels work to restrict stocks' movements. You'll be happy to know that these prices aren't magical levels. Instead, they're a function of investor psychology and market mechanics.
So how can these "price barriers" exist in the market?
Ultimately, market prices are determined by what investors are willing to pay, supply and demand. If a stock is trading higher (in a phenomenon known as a trend), it can come across a pocket of supply that completely absorbs buyers' bid prices. When that happens, the uptrend halts as trades get filled at the same price level -- a price that's now become resistance. With all of that overhead supply, it's impossible for share prices to move higher under the calm, steady buying that had previously helped shares rise.
Support works much the same way, except that support levels occur where there is a glut of demand for shares that absorbs all of the ask activity for the stock.