The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

SELLING AT RESISTANCE LEVELS

Moving averages provide targets for rallies from deeply oversold levels. Channels or envelopes provide targets for short-term traders. These tools help catch short-term swings—but such moves seem puny to long-term position traders. We used to call such people investors, before the world accelerated and everyone became a trader. Long-term traders, whose time horizon is measured in months or even years, need bigger targets. A deer hunter needs a bigger gun than someone who goes out shooting rabbits.

Support and resistance zones provide targets for long-term trades. We can identify support and resistance by looking for price levels where a great deal of trading has taken place, clearly more than the areas immediately above or below.

To have confidence in any technical tool we must understand how it works and what it measures. If we are going to rely on support and resistance, we need to understand the reality behind them.

Each price tick reflects an agreement between a buyer and a seller, but it also represents the opinion of the crowd that surrounds these two people. Had the crowd disagreed with either the buyer or the seller, someone would have stepped in, and that trade would have happened at a different price level.

The more transactions occur at a certain price level, the more people believe that level represents value. A congestion zone on a chart tells you that many market participants consider that level a fair value and are prepared to ...