Welcome to post #7.
With candlestick charts moving into focus (after post #6), we now need to understand what the price is doing.
If you can watch a stock chart long enough, you’ll notice something strange. The price will pull back to some specific price level, say $1.50, and then will immediately push back up. It comes back to $1.50 a few days later… and bounces.
There's a trampoline on top of $1.50.
We refer to that in trading as Support.
\### What is Support?
The "invisible floor" of a chart is called support. It's a price point where a ton of buyers jump on it and say, “OK then, I'm buying this stock at a discount.”
So many people purchase at that exact level, the huge demand keeps the stock from dropping any further and pushes the price back up.
\### What is Resistance?
Resistance is just the opposite. It's The Invisible Ceiling.
Suppose the stock increases in value to $3.00. It continually drops each time it reaches $3.00. Why? The folks who had purchased at the $1.50 support are now viewing their accounts and seeing 100% profit, and choosing to press “sell.”
However, if everyone starts selling at the same time at $3.00, then all the supply pushes the price back down.
The easiest way to use this:
Professional traders don't simply act impulsively when buying. They read the chart, identify the level of the support floor, and purchase "as near as they can get to the support floor".
Why? It provides you with the lowest risk.
When you purchase a stock that is on the $1.50 support level, you know buyers are generally known to be present there. What if they don't though? If the stock were to drop to $1.40, what would happen to the value of the deal?
It's simply a small, manageable loss and a quick sell.
The novices, however, do the opposite. They are watching the stock heading up to the $3.00 resistance level. They experience huge FOMO, put in money at $2.95, and then are totally squandered when the resistance sets in and everyone else gives a sell.
Golden rule of chart trading: Purchase on support. Sell at Resistance. Avoid purchasing in remote areas.
In post #8 we are going to examine what will happen when the stock actually goes through that resistance ceiling. It is known as Breakout and is where the largest amount of money can be won.