Support and Resistance - How to Profit With Technical Analysis

With proper knowledge and training, the financial markets can be a consistent source of cash flow. Yet before any trading happens, a basic working understanding of technical analysis and trend identification is crucial. Support and resistance are where we begin in any discussion of technical analysis and provide the framework for learning how to spot a trend.


Here we will give basic operational definitions of these important terms and then describe how they can be used to increase profit margins.

Trend

The trend is the basic direction the market is moving. Trending patterns enable us to determine what actual market participants are doing, and respond accordingly with the proper trading strategy. In many ways, trend analysis gives us a window into the psychology of the markets, and how market participants are responding.

The stock market moves in a series of short term highs and lows, sometimes referred to as "peaks" and "troughs". It is the overall direction of these "peaks" and "troughs" that constitutes a trend. The technical definitions of these highs and lows are quite simply, support and resistance.

Support

The support area on a chart is the area beneath the overall market where buyers outweigh the sellers. Buying interest is strong enough to keep the price from moving farther down and so it reverses up again.

Resistance

Resistance on the other hand, is simply the opposite of support. It is the price level above the market where selling pressure overcomes buying making it difficult for the buyer to drive up the price.

Volume

Another critical component that relates to both support and resistance is the volume of shares being traded. Volume helps to measure the significance of a support or resistance level. If a level is formed with heavy volume, either buying or selling, that level is even more significant to our analysis.

Without understanding these technical terms, it becomes easy to trade recklessly based off educated guesses or rumors. Yet once a working knowledge of these terms is mastered, traders are able to precisely set entry and exit points and aid in choosing the correct trading strategy.

Trend, Support, Resistance, and Volume are the basic building blocks of learning and understanding technical analysis. It forms the basis of learning price patterns, and is the beginning of truly understanding the pulse of the market.

Jeffrey Ziegler
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