The more proficient a trader becomes at technical analysis, the more profitable the trading ventures will become. One of the most effective short-term strategies involves watching support and resistance indicators and using those markers to find good stocks to buy and to know when it’s time to sell. This works when the stock price is trending upward over the long term and also when a price is essentially rolling up and down but not making any progress upward.
Viewing charts with prices rolling between two points is probably the easiest way to understand support and resistance. The chart looks like hills and valleys with the price oscillating up and down. The support line is at the bottom and resistance line on top, creating a floor and ceiling of sorts. What this means in trading behavior is that active traders and long-term investors wait for the price to come down to a certain level and then buy shares. They do this because they’ve seen that the price has not gone lower than that for a long time. It’s a wise entry point.
Active traders sell when the price hits the ceiling. They know that the price has not gone above that ceiling for a long time. This is also the point where long-term investors may finally dump a stock that is stagnating. They wait until it reaches that hill peak so they can get the most amount of money possible.
These oscillating chart patterns don’t last forever. In fact, someone trading those patterns may only get three or four profitable trades from the fluctuation before the price breaks through resistance or plummets through support. Another common occurrence is the price range getting progressively narrower until it’s very difficult to trade at all.
Trading support and resistance also works when the price is steadily moving upward over time, but it tends to be more complicated. Traders must determine where the support and resistance lines are, and this can be somewhat arbitrary when the lines aren’t horizontal. Skilled traders use additional indicators to evaluate the situation, such as moving averages over varying time frames.