Trading using support and resistance

Support and resistance have long been a staple of trading indicators. Support and resistance is a simple concept that has its roots in supply and demand theory. Looking at a chart we see price action that appears to be random, but by adding support and resistance theory to the equation we will see that price movement are not always random. I first noticed this before I started trading. I used to watch the T.V. stock market, and over time I noticed that at certain price levels the Dow Jones Industrial Average seemed to have difficulty breaking through certain price levels. This was more obvious when the price was trying to go through round numbers.

As prices go up, there comes a point when traders feel the price is too high and buyers will slow down. This is called resistance. Generally, for a price area to be called resistance, you must have 3 or more strikes at or very close to the same price. The same rules apply to support, but this term describes the lack of continuation of price declines.

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When the price falls to a certain point, it is seen as a good deal. Similar to a store that puts things up for sale. When the price sells in effect there are usually more buyers willing to buy. Markets work the same way. The more price levels hit, the stronger the support or resistance.

Many times there may be no good explanation for a support or resistance level other than that people believe in it. Often this is enough to make the market stop or change direction. Perception is often the motivation behind market price movements. I have seen prices move dramatically because of rumors. On the other hand, I have seen very little price movement after what one would think would be a major announcement.