Thursday, October 11, 2012

How to Use Support and Resistance in Stock Investing?

When I first come in to this term support and resistance in technical analysis, the first questions that come into my mind is "Who define the support and resistance in a particular stock"?

Unfortunately, there is no really a fixed definition because is a defined by you with your common-sense which mainly depends on how you want to draw the support and resistance lines.

What is Support and Resistance lines?

Support is drawn by connecting 2 or more troughs(bottoms) of a stock chart and resistance is drawn by connecting 2 or more peaks(tops) of the stock chart. Let's take INTC as an example below where I draw the support and resistance line by myself.

The purple is the resistance line and the green line is the support line. Resistance line acts like a temporary ceiling which prevents the stock price goes beyond this line. If the stock price goes beyond this line, it basically means it violated the resistance zone. The stock prices will continue to shoot up.

Same to support line, it acts like a temporary floor which prevents the stock price goes below this line. If the stock price goes below this line as shown in the graph (after timeline A), it violated the support zone. After timeline A, the support line becomes a resistance line.

So, what does it mean?

The support line tells you investors may buy at this point and resistance line tells you investor may sell at that point. So what you need to do is before the stock price reaches the resistance line, you sell and before it reaches the support line, you buy. Sound simple, huh?

However if it violates the resistance zone, you buy immediately. Same to if it violates the support zone, you quickly sell it because it will fall deeply and the support line will become resistance line as you see in the timeline A in stock chart above.

The support line also tells you whether the stock price is in uptrend and resistance line tells you whether it is at downtrend. From the chart above, it is at downtrend (look at the resistance line).

When the support and resistance line form a triangle shape (also you can see at the chart above), there is possible a trend reversal depends on whether it violates the support or resistance zone.


When the support zone is violated, you need to come out a new support zone. After that you can start to predict again. Similarly when the resistance zone is violated. Anyhow the most important thing that I think we must understand is the support and resistance lines are drawn by ourselves which also means that if you draw different than mine, then we may have different analysis outcome! I

I know there are many stock indicators but I think for starting, I'm going use only 2 methods (i.e. support & resistance and moving average) to predict my stocks and do some researches. Let's see how it goes.

P/S: Feel free to share with me if you have successful experience using support and resistance in your stock trading. I want to learn from you.


Alvin Lim said...

Nice sharing. You are more and more into technical analysis. :) I'm still very poor in that to be honest.

ChampDog said...

Still new and still learning. :) Technical analysis is a very complex topic by itself. I am not sure if that is even working. Need to try and error and see how accurate it goes...

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