How to Use Support and Resistance When Trading Stocks Online

Knowing what support and resistance is to be able to succeed in stock market trading. Being able to identify these areas will give you higher probability entry and exit points to help lower your risk. By understanding what is going on around these areas will help you identify them more clearly on a stock chart.

Markets move based on supply and demand. When the there is more buying pressure than selling pressure, prices move up. The opposite is true when prices are moving down. Support and resistance are key points in price where one begins to overtake the other. Support is an area where sellers had been in control, but buyers begin to step in and outnumber the sellers. When this happens the stock will stop and reverse. Resistance is an area where buyers had been in control, and the sellers begin to overtake the buyers.

There are several different methods for finding support and resistance. One of which is using technical indicators. Moving averages are a great way to find support and resistance. Each moving average has a different strength of support or resistance. The longer the timeframe the stronger the support or resistance will be. For instance, support and resistance around a 200 period moving average is much stronger than around a 20 period average.

Another way to identify support and resistance is through past price action. Looking back through chart history you will see areas of consolidation, which is a narrow sideways trading action where neither buyers or sellers are in control. These areas of consolidation provide strong support and resistance, and the longer the consolidation was, the stronger the support or resistance will be.

Lastly, trendlines can provide support and resistance as well. Since stocks never move in a straight line, but more of a pattern of waves, trendlines can be used to spot the overall trend. These areas on the trendline where price comes back to and bounce off are areas of support and resistance.

These areas of support and resistance give higher probability online trades with lower risk. If buying stocks around support and selling stocks around resistance you can set your stop loss just beyond that support or resistance and limit your exposure. Since these can be points where stock prices reverse, if you are already in a trade you can reduce and book some profits around these areas and hold onto small pieces to see if prices break through these areas. An important thing to remember is that once support is broken, it will likely switch roles and now become resistance. The opposite is true for resistance. Once broken, it will likely provide support.

The more you understand support and resistance, the better you will understand how and why the stock market moves. It's all about buyers and sellers (the people buying and selling stocks online). The best online traders watch for these areas and being able to identify them will help you become a more successful online stock trader.

TradeStocksAmerica Staff

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