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TRADING SUPPORT

 

Support and resistance ranges are key concepts that will sharply refine your exit decisions to a fine point. At first glance, the imprecise nature of ranges may appear to be a detriment to precision, but your trailing stops will ensure some compensation for this potential problem. Always use trailing stops when exiting a position and always be sure to revise them according to the desired tightness or looseness of your exit strategy.

Support and resistance levels exist only by virtue of traders' and investors' memories of their experiences with trading a given security at certain levels in the past. Investors will be more inclined to lend their support at the same level at which a large crowd of investors once purchased the stock. Traders tend to have the expectation that a stock will rise again from the same level as it did in the past. Even if those traders did not hold the security in a previous session, they will still look to history to be their guide, examining prior examples of session bottoms and levels of support.

You should also note that particular zones of support or resistance are expected to shift to their opposite once their zones have been breached. For example, a strong zone of resistance, once breached, becomes a psychological victory for traders and quickly turns into a zone of support for the ensuing trend as traders continue to celebrate the victorious breakout. By contrast, once a zone of support is destroyed, the psychological deflation is all too real, as the chart stubbornly refuses to touch this zone again in the near future.

Traders may practice buying at the lower edge of a range and shorting at the upper edge. In up trends, bears who engage in short selling will naturally feel pain, and bulls will experience regret that they did not buy more. Both will be eager to buy, if and when the market gives them a second chance, which will create support during investors' reactions in an uptrend.

Resistance indicates bulls feeling pain, bears feeling regret and both camps ready and waiting to sell. A downward breakout from a trading range will cause pain to bulls who bought, and will make them eager to sell during the first market rally so that they can get out even. Bears will regret not shorting more and wait for that same rally to allow for a second chance to sell short. The pain of bulls and the regret of bears in a downtrend translate into what is referred to as resistance.

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