The time period support and resistance areas stay valid will vary greatly. They can be very short, or even last for decades. The longer a support or resistance area stays valid, the more significant it becomes. A breakout of a year-long resistance area is much more important, than a breakout of a week-long resistance area.
The reasoning behind these support and resistance levels and also the procedure of identifying them is really a complex and ongoing problem because they can change over time. Let's shed some light on this with the help of investor psychology, and then outline the technical aspects. Consider an investor who has just bought a share for $100.
It is interesting to watch a stock drop to a certain price level a number of times, then bounce back up in price. The stock is said to have bounced off a support level. It is equally interesting to watch a stock rise to a certain price level, and each time, it is like hitting a ceiling. The stock drops back down in price. This is caused by human nature, or common human reactions. They show up on the stock charts as support and resistance levels. This is an important aspect of stock market technical analysis.
You see, support and resistance levels are there to produce a web theme to the market - anything that one can lay over the marketplace's movements and make feeling of all its ups and downs. But the right way to commerce is to hold out for value to hit the apparent support and resistance levels prior to trading.
Of course, this is really a simplistic view. In reality there are lots of more elements to think about. For instance, several investors tend to fixate on round numbers. So a stock which is priced around $48 and rising will discover it tough to break past the $50 barrier due to the fact several investors will exit when it hits $50 (as opposed to $49 or $50.2, $50.8, etc.), thus creating an RL.
The reasoning behind these support and resistance levels and also the procedure of identifying them is really a complex and ongoing problem because they can change over time. Let's shed some light on this with the help of investor psychology, and then outline the technical aspects. Consider an investor who has just bought a share for $100.
It is interesting to watch a stock drop to a certain price level a number of times, then bounce back up in price. The stock is said to have bounced off a support level. It is equally interesting to watch a stock rise to a certain price level, and each time, it is like hitting a ceiling. The stock drops back down in price. This is caused by human nature, or common human reactions. They show up on the stock charts as support and resistance levels. This is an important aspect of stock market technical analysis.
You see, support and resistance levels are there to produce a web theme to the market - anything that one can lay over the marketplace's movements and make feeling of all its ups and downs. But the right way to commerce is to hold out for value to hit the apparent support and resistance levels prior to trading.
Of course, this is really a simplistic view. In reality there are lots of more elements to think about. For instance, several investors tend to fixate on round numbers. So a stock which is priced around $48 and rising will discover it tough to break past the $50 barrier due to the fact several investors will exit when it hits $50 (as opposed to $49 or $50.2, $50.8, etc.), thus creating an RL.
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