Why You Should Look For Support And Resistance Levels When Trading Shares
James Woolley
June 09, 2009
If you spend a lot of time trading shares then you will probably have noticed that prices generally tend to spend a large amount of time trading within areas of support and resistance. These levels are very important and if you can learn how to actually trade around these levels, then you can become a very profitable trader.
Let me first of all define what I mean by support and resistance. Basically if a share price has repeatedly fallen to the $100 level, for example, and bounced upwards from this level every time then $100 is clearly a very strong support level. So therefore it may be worth placing a long position every time it approaches this key level of support.
Similarly if the price in another share keeps testing the $100 level from below but always fails to break through this level then this can be a seen as a very strong resistance level, and therefore we can consider opening short positions from the $100 level in this instance.
If these support or resistance levels are broken then we can simply close out the position for a small loss because it means that there is a high probability that a breakout may be on the cards. We could also consider opening a new position in the direction of this breakout.
Indeed breakout trading is one of the most profitable ways of trading shares because the longer a share trades within a tight trading range, the greater the breakout when it does eventually arrive. So it's always worth keeping an eye on shares that are breaking out of a long-established trading range because there are some big profits to be made.
This is mainly due to human behaviour because lots of traders are all watching the same charts and so when they see a share breaking through a critical support or resistance level, they will all jump on board and it kind of becomes a self-fulfilling prophecy.
So the overall message I want to get across in this article is that if you want to learn all about how share prices actually move, you should start off by learning as much as you can about support and resistance levels. Then once you have learnt the basics I recommend you look at more advanced studies of support and resistance such as pivot points and fibonacci retracements because it's amazing how often the price reverses around these key levels.
Click here to read a review of TradeKing and to read a full Marketclub review.
Let me first of all define what I mean by support and resistance. Basically if a share price has repeatedly fallen to the $100 level, for example, and bounced upwards from this level every time then $100 is clearly a very strong support level. So therefore it may be worth placing a long position every time it approaches this key level of support.
Similarly if the price in another share keeps testing the $100 level from below but always fails to break through this level then this can be a seen as a very strong resistance level, and therefore we can consider opening short positions from the $100 level in this instance.
If these support or resistance levels are broken then we can simply close out the position for a small loss because it means that there is a high probability that a breakout may be on the cards. We could also consider opening a new position in the direction of this breakout.
Indeed breakout trading is one of the most profitable ways of trading shares because the longer a share trades within a tight trading range, the greater the breakout when it does eventually arrive. So it's always worth keeping an eye on shares that are breaking out of a long-established trading range because there are some big profits to be made.
This is mainly due to human behaviour because lots of traders are all watching the same charts and so when they see a share breaking through a critical support or resistance level, they will all jump on board and it kind of becomes a self-fulfilling prophecy.
So the overall message I want to get across in this article is that if you want to learn all about how share prices actually move, you should start off by learning as much as you can about support and resistance levels. Then once you have learnt the basics I recommend you look at more advanced studies of support and resistance such as pivot points and fibonacci retracements because it's amazing how often the price reverses around these key levels.
Click here to read a review of TradeKing and to read a full Marketclub review.
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