Reward 1000 Tiger-coinsHi, tigers. On the most-concerned questions of how to decide when to buy and sell stocks, @Ron18 and @Evey77 asked me how to draw a support and resistance lines.
This article gonna show you the easiest part in technical analysis - draw a support/resistance line.
1. How to draw a support/resistance line?
Support/resistance lines are horizontal or trend lines composed of two lows/highs on the candle chart that prevent prices from continuing to fall/rise.
For finding the support line and resistance lines of a stock, we need to carefully study the stock chart and observe those points on the candlestick where the stock prices had reached their lowest/highest price at least two times.
Then, when constructed as a straight line on the candlestick chart, these points will constitute the support/resistance line of the stock.
2. How to apply the SL/RL in the trade?
Investors tend to sell when the stock price reaches the previous high point and buy when it reaches the previous low point.
A. For stock that consolidates in a certain area, we can draw a horizontal line.
Horizontal line $Pinduoduo Inc.(PDD)$
red circles are the highs and lows on Pinduoduo's candlestick chart
In this case, I will buy $Pinduoduo Inc.(PDD)$ at $83 and sell it at $99.
B. For stock that move in one side, we can draw a trend line.
Trend line $Apple(AAPL)$
the highs and lows are noted in yellow and blue dots
Trend line only shows a possible trend and won't necessarily move as it shows. To apply trend line in trade, we need to look more indicators like MA or MACD and some pattern like golden cross and death cross.
I still take the horizontal line on the chart as reference and sell $Apple(AAPL)$ at $155.
3 principles of support/resistance line
Principle 1: SL & RL can be transformed into each other.
When a resistance line is broken, it becomes a support line; and when a support line is broken, it becomes a resistance line.
This principle reflects the psychological and practical situation of investors, as most investors tend to sell near resistance lines.
Once the resistance line is broken, many investors have to close their short positions and turn to long positions, causing the former resistance line to become a support line.
Principle 2:The 50% rule
Stock may consolidate in a certain area, when it rises above/ drops below this area, it will change the direction.
When the stock price rises or falls by 50%, investors tend to sell or buy based on their profits or losses rather than objective reasons.
When the stock price rises by 50%, investors tend to sell and take profit, while those holding cash would think it is too expensive to enter the market.Thus, the resistance line is created in 50% level.
When the stock price falls by 50%, investors tend to sell, but those holding stocks tend to buy more because the average holding cost is lower. The buying power creates a support line.
Principle 3: The longer the support or resistance level exists, the stronger it becomes.
When the support or resistance levelare tested for many times, it becomes more effectiveas more investors use it as a reference point for buying and selling.
In a bull market, the significance of resistance levels is relatively weak, while that of support level is usually stronger;
In a bear market, it is the other way around, the significance of resistance level ismoreimportant than that of support level.
Risk warning
Support/resistance lines are only tools for us to make a decision. The stock won't necessarily move as it shows. We need more information like fundamentals and company news.
Do you find support/resistance level useful in your trade?
Leave your comments on what else do you wanna know!
Comments
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