If you’re new to stock market trading, one of the best pieces of advice I can offer you is to study the price charts of some of the biggest listed companies. You should hopefully start to see that most of the time the share price will either trade within narrow trading ranges between support and resistance points, or will break out and make new highs or lows.
So you can use this information to improve your overall success rate when trading shares because the price will often react in a fairly predictable manner around these key levels. For example if the price of a particular share continues to push up towards the $50 level but never manages to break through, then you could confidently place a short position every time it approaches $50 (with a stop loss just above $50).
Similarly if the reverse is true and the price keeps falling to $50 before bouncing upwards, then $50 is a fairly good place to enter long positions. So as I say, support and resistance levels are very important and it’s worth paying attention to them. Most of the time they are fairly obvious to spot on a basic price chart.
These key levels work because other traders like yourself see the same information and react in exactly the same way. Indeed that’s why technical analysis in general works so well because it’s a reflection of human behaviour and the fact that we all like to follow the crowd.
So not only can you profit from taking positions based on the assumption that prices will bounce off established support and resistance levels but you can also trade the breakouts that occur when the price does eventually break out of one of these support or resistance levels.
Breakout trading is one of the most profitable ways of trading shares because as soon as the price jumps out of a long established trading range, there is often a herd mentality because people jump on board as soon as the breakout is under way, which of course provides additional momentum to the breakout.
So it’s definitely worth paying close attention to these key support and resistance levels because they can provide vital clues as to a share price’s future direction. If you are a more advanced trader you may even like to add in fibonacci levels as well because these levels also act as strong support and resistance levels. Whichever tools you use you will generally find that these levels are just as effective as any of the technical indicators that you are using at the moment.
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