Hands Down, the most important concept in the world of Technical Analysis is the study of Support & Resistance. The reason being is that it lays the foundation upon which everything else is built. In fact, if you can master this first building block, then you’re on your way to becoming a master trader. Support & Resistance functions as invisible lines on a stock chart; however to the trained eye these lines are not invisible at all. Professional traders mark these lines on a stock chart with extreme discipline and focus. The reason being of course is that they understand future price direction is determined at these predefined price locations. Support acts as a floorboard for price, often stopping it falling further. Resistance acts as a ceiling stopping the price of a stock from moving higher. Hence the name Support & Resistance!
With this being said, the outcome of any investment is largely determined by this simple concept. The good news is that it doesn’t take long for you to learn how to do this yourself. You may be asking yourself “Why does this work”. Again, the good news is that I’ll give you the answer right away. The reason this concept works is attributed to the psychology of those participating in the market. Stocks are predictable because people are predictable. As such, people remember the past and have a propensity to behave in the future based on those memories. Whether you wish to admit it or not, most people follow the crowd and make illogical decisions regardless of present facts. There is nothing more substantiating than the behavior displayed in the stock market every day.
Trader/Investor sentiment justifies the concept of Support & Resistance. Optimism leads traders to justify buying whereas fear leads traders to justify selling. When you understand and commit wholeheartedly to this simple ideology, you will soon realize that you have inherited the first step to success in the market. Support & Resistance will operate similar to that of a road map. It will work as a reliable framework showing you where key junctures of balanced buying and selling become lopsided. This in and of itself presents a competitive advantage in the market! Always remember price movement is driven by excessive demand & supply in a financial market. Demand equates to buying pressure whereas supply represents selling pressure.
Inevitably levels of Support and Resistance will “break”; this is where the trading opportunity presents itself. When this occurs it signals that the current dynamics of buying and selling has changed. Master traders respect the psychology behind the change in price moment and are quick to understand how other market participants feel about the particular stock. The difference between professional traders and amateur traders is simple. Professional traders understand that amateur traders react to price movement emotionally. Given this, when you’re holding a losing position, they will press even harder until it becomes too emotionally overwhelming that you must exit your position (usually for a loss). It is the professionals who hold this secret closest because they understand the significance of Support & Resistance when making investment decisions.
For those of you who want to learn the finer intricacies of Support & Resistance and begin the practical application of this content I have a solution. I supply free, educational videos hosted on my website at Pivot Point Trading. If you’re serious about making money in the stock market you’d be silly not give it a look.