Technical Analysis Basics: Support and Resistance Levels

What are support and resistance levels? Subscribeto get INSTANT alerts when I post a new video outlining my penny stock trading techniques.

This is basic technical analysis. This is how you judge a stock based on past levels. It's not an exact science, but generally speaking, a resistance level is a price at which the stock could not get above in the past. Whether it's an entry-day resistance level, or one week, or one month, or one year, or 10 years. I like to look at multiple different time frames because then you can see where the stock has had problems with in the past, it's kind of like a ceiling.

A support level is like a floor. So you're looking back at the previous levels, the previous prices at which a stock had bottomed. So, let's say the stock is trading with a ceiling of $7 a share, and the floor of $4 a share, all in the past year, and it's been bouncing back and forth between four and seven like a ping pong ball. Maybe they report good earnings, the stock breaks above seven and goes to 10 because now the value of the company has gone up. A company that reports good earnings, the value of the company should go higher.

When a stock breaks below a key level, it's probably going to stay there. Especially if it breaks that key level convincingly. Sometimes a stock will drop below $4, and it'll go to like $3.99. That's not a big breakdown that could be a fake-out. But, if the stock drops from $4 to let's say $3, and it has bad news, most likely it's going to stay down there.

Go back, look at a stock's previous highs, and previous lows, and don't expect them to break very easily, but if the news is right, it can break out or break down, and that can be very good for you. If you're buying a stock and it breaks past a key level, that's a good breakout. If you're shorting a stock, you know, if you expected bad news and it breaks below a key level, for support, that's very good news. But you don't want to go against it.

You don't want to long a stock that's breaking to new lows; you want to cut your losses quickly. And you don't want to be short a stock that's breaking to new highs. You want to cut your losses quickly. You want to try to go with the trend. Strong stocks tend to get stronger, especially when the news is positive, and weak stocks tend to get weaker when the news is negative.

Go with the flow, don't try to fight it, don't try to be a genius and say, "Oh, this is the one time I think the odds "are not going to play out." The odds are the way they are. Statistics are the way they are. So go with them, make them your friends, don't make them your enemies.

* Results may not be typical and may vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here