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The following article was published in our article directory on April 11, 2011.
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Introduction To Locating Support And Resistance Levels

Article Category: Finances

Author Name: Mark Dearth

Technical analysts spend a entire lot of time trying to figure out support and resistance levels. The SL (support level) marks the price at which a security tends to bounce back after a drop. The RL (resistance level) is the opposite, and marks the point at which a security trending upwards hits a ceiling and cannot climb further up.

Why each stock has these support and resistance levels and the way to figure out them is a complex subject that's made harder by the fact that these markers tend to shift over time. Let's try a simple explanation first involving investor psychology, just before acquiring to the technical jargon. Assume that an investor buys a share for $100.

Let's say the share climbs up to $120 but prior to the investor can offload the share, it drops back down to $110. Now it starts going up again, and when it reaches $120 the investor has to think about whether or not it is going to drop back down and if so, wouldn't it be far better to offload it just before it drops? Since a entire lot of people face the same issue and actually do offload it at $120, the price drops again.

The stock thus gets marked with a $120 RL and finds it difficult to break past it even if the company behind the stock is worth a great deal more. The concept is the same when the stock is trending downwards. In the above case, since the stock rose once more after dropping to $110, this cost gets marked as an SL where investors seeking value believe it is going to rise and begin purchasing, which ensures that the stock bounces back at this cost.

No doubt this can be a bare-bones theory. The way it truly works is really a entire lot a lot more complicated. There are numerous issues, such as round numbers. For example, a stock currently at $48 and going up will locate it hard to crack the $50 ceiling simply because it's a round number at which numerous investors will start selling (rather than $49, $50.2 or $50.8), and this ensures the stock stops rising and creates an RL.

There are also proactive methods to figure out what the future SL & RL is going to be. If the long-term forecast for a stock is favorable, it tends to crack past the RL eventually and climb up to the next 1. This next RL or SL can be predicted using strategies like trendlines and calculated pivots.

It's also helpful to know that an SL & RL can replace 1 another as the stock moves in one direction. So stock that has just broken past a $50 RL will have $50 as its new SL. Conversely, a stock that has just fallen down below $50 will have $50 as its new RL. You will find a huge number of aspects like these that analysts require to factor in when figuring out support and resistance levels, and it really is a highly interesting part of the job.

Keywords: support and resistance levels,stock support levels,stock resistance levels,trading with support and resistance

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