Getting Started in Chart Patterns, 2nd Edition

Chapter 4

Support and Resistance

The Most Important Chart Patterns

I consider support and resistance to be the most important chart patterns. Why? Because they show how much you are likely to make and how much you are likely to lose on each trade. That's like playing poker and knowing the hands of your opponents. You won't always win, but it helps. Used intelligently, support and resistance areas guide you along a path to riches while avoiding the potholes.

What Is Support and Resistance?

Support and resistance zones are locations where price stalls. Usually, support and resistance encompasses a price range. A support zone, for example, is where overwhelming buying demand stops a decline. A resistance zone is where overwhelming selling pressure stops a rise.

If you bought a stock at 8 and watched it rise to 10 before dropping back to 8, you might say, “As soon as it gets back to 10, I'm selling.” What will happen when others do the same? If the stock rises to 10, it'll hit a brick wall and bounce lower as you and others sell their shares. Eventually, though, everyone who wanted to sell will have dumped their shares, allowing buying pressure to send the stock higher, piercing overhead resistance.

Have you ever wanted to buy a stock, but it soared away from you? Others feel the same way. They vow that as soon as the stock returns to their buy price, they are going to pounce. And they do. That puts a floor under the stock, supporting it, and pushing price upward if buying demand is ...