Online Stock Trading for Beginners - Understanding Support and Resistance on the Charts
Stock Charts for Beginners
When trying to analyze stock charts the two most basic concepts to understand are those of 'support' and 'resistance' of a stock price or a stock market index.
Support is defined as the price level which has supported a stock in the past i.e. which a stock has found it difficult to fall below. The reason it doesn't fall below this price is because a lot of buyers are willing to buy the stock at this price.
When a stock price drops down towards its support level it will either be reconfirmed as support or ignored. If a lot of buyers move in the stock price will move back up thus confirming the support level, if there are not enough buyers the stock price will continue to fall and the support level is not confirmed. Typically if a support level is broken through, the stock price will continue falling for a while then eventually turn back up and the old support level now become a 'resistance' level.
Resistance is defined as the price level which a stock rises to before it meets 'resistance' (i.e. more sellers than buyers) and has to fall back.
Often a stock price will bounce around between a support level and a resistance level like a horizontal zig-zag line. This is known as a sideways trend and traders will often trade it by buying at the bottom of the trend and selling at the top of the trend. This by the way is the opposite of what Warren Buffet does, he is a long-term trader who buys a stock at what he considers to be a fair price and then holds it for years or even decades.
Online Stock Trading for Beginners
Although support and resistance are very basic concepts in stock charting analysis, they are nonetheless very important, as traders base anywhere between 80% and 90% of their trades on these simple concepts of support and resistance i.e. buying at the bottom of a trend (sometimes called a channel) and selling at the top.
This of course explains why charts work, because traders tend to sell at certain levels and buy back at certain levels, thus creating patterns which then become self-fulfilling prophecies !
The following video by the guys at TJMacTrading on support and resistance in stock charts should make things clearer.
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