Support and resistance may be one of the most basic concepts in stock trading and technical analysis, but it is also one of the most useful. If you know how to use them well, you can already start building a profitable trading strategy. So here are 3 simple but powerful ways to use support and resistance in making profitable trades.
1. Find the best time to buy or sell your stocks.
This is a very basic use of support and resistance, but it is still one of the most effective.
The support and resistance levels often serve as an indicator of a coming shift or reversal of the current price movement. These levels serve as a guide for when we should start buying or selling a certain stock.
We buy stocks as the price nears the support level. Once it reaches the support, demand becomes stronger than supply and more people will want to buy that stock, making the price go up.
On the other hand, we sell stocks as the price gets closer to the resistance levels because this is when you can sell for the highest price. When the stock reaches the resistance level, more people will want to sell and the stock price will start going down again.
2. Identify stronger support and resistance by the length of time.
There are many support and resistance levels that can be found in a chart based on how long or short the time frame is. The longer the time frame, the stronger the support and resistance and the harder they are to break. In other words, a 10-year support or resistance is much stronger than a 1-month support or resistance.
Although the interpretation of a chart is subjective and different for everyone, seeing the bigger picture gives traders an idea of where the stock can go and how easy or difficult it will be for the stock to get there.
Next time you’re looking at support and resistance, try looking at the support and resistance across different time frames to see what the big picture really looks like.
3. Spot potential breakouts, which can lead to huge profits.
The resistance level, once broken, becomes the new support level. If sustained, it gives traders an idea that there is very strong demand for the stock. Breakouts like this usually signal the start of a major price trend, which can lead to huge profits.
This increased volatility during breakouts attract traders because it can offer great returns with a minimal amount of risk, especially if there is no existing resistance in place (i.e. when a stock breaks out to a new all time high).
Keep an eye out for breakouts and wait to see if they are sustained. If they are, it’s likely that you’ll be able to make a profit off of buying that stock.
Don’t forget, you can also combine these concepts to make your trading decisions.
For example, if you see that a stock has broken above its 10-year resistance, then you know from #2 and #3 above that it has the potential for huge profits and you should definitely consider buying that stock. If you want to buy a stock but it’s near its resistance level, then maybe wait a few days to get a better price.
Simple moves like this, applied consistently and with proper risk management will help you become a more profitable trader.
Do you have other tips and tricks for using support and resistance? Let us know in the comments below!
If you hang out with a lot of traders, then you’ve probably heard about Elliott Waves at least once or twice. And if you’re a beginner in the stock market, then you’ve probably been confused by them at least once or twice too!
In this article, we’ll explain the basics of the Elliott Wave theory, give you a simple overview of how it works, and break down its pros and cons so you can decide if it has a place in your trading strategy.
Background
Price movements in the stock market can seem quite random, especially if you’re a beginner. But a quick intro on technical analysis will show you that the market actually moves in repeating patterns. The Elliott Wave theory is just one method under technical analysis that maps out how these patterns unfold.
Back in the 1930’s, an accountant named Ralph Nelson Elliott noticed that there was a specific pattern of waves that appeared again and again in the stock market. This pattern of waves are what we now call Elliott Waves.
How It Works
The basic Elliott Wave pattern includes two phases—an impulse phase and a corrective phase. The impulse phase has 5 waves and goes with the dominant trend while the corrective phase has 3 waves and goes against the dominant trend.
Here’s a simple illustration to show you what these waves look like when the overall trend is bullish (Fig. 1) and when the trend is bearish (Fig. 2).
Eventually, the shorter cycles of Elliott Waves can also combine to form bigger Elliott Waves spanning longer periods of time. Every completed cycle, no matter what degree, will still develop the same 5-3 wave pattern.
Elliott Waves can form over many different time frames. A cycle can be completed in just a few minutes or over centuries! Although there’s no exact rule on which degrees correspond to which time frame, there are 9 generally accepted levels and labels:
Grand supercycle: Forms over hundreds of years
Supercycle: Forms over many decades
Cycle: Forms over a few years (minimum of 1 year), but possibly also a decade or two
Primary: Forms over a few months to a couple of years
Intermediate: Forms in a few weeks to a few months
Minor: Forms in a week to a few weeks
Minute: Forms over a few days
Minuette: Forms in a few hours
Subminuette: Forms in just minutes
The Elliott Wave theory can easily become complicated, but at the end of the day it’s just a form of pattern recognition. Knowing the pattern allows you to predict price movements and make better trading decisions.
To use the Elliott Wave, you must first identify two things:
If the dominant trend is bullish or bearish
Which wave you’re currently on
To spot Elliott Waves correctly, make sure to follow the 3 basic and unbreakable rules:
Wave 2 should never go beyond the start of wave 1.
Wave 3 cannot be the shortest among waves 1, 3 and 5.
Wave 4 never overlaps with wave 1.
Conclusion
Recognizing the Elliott Wave pattern can involve a lot of subjectivity, so results will vary from trader to trader. In some ways, you might even say that executing it is more of an art than a science.
We can’t tell you if this method will work for you or not, but what we can say is that there are people who have used it and profited from it.
What about you? Are you going to try the Elliott Wave or is there another method that you swear by? Let us know in the comments below!
Technical analysis is a term that we hear a lot in the stock market. But what does it actually mean and how can it help you with stock trading? Today, we’ll cover the basics and tell you everything you need to know.
What is Technical Analysis?
Technical analysis (TA) is the use of past market data to analyze stocks and make better trading decisions. It’s based on the idea that supply and demand will determine a stock’s price more accurately than the company’s intrinsic or “true” value.
Technical analysts look at the price movement over time, trading volume, and other historical market data. Then, they find trends and patterns which can be used to predict future price movements.
It can seem complicated at first, but many traders actually find it easier than its counterpart, fundamental analysis. It’s less subjective, involves less research, and can be used even if you don’t know a lot about the industry or company.
**To read more about fundamental analysis vs. technical analysis, click here.
The 3 Assumptions of Technical Analysis
Technical analysis is very popular, especially for traders who like short-term investing. But it’s important for you to understand it well before risking your hard-earned money. Before you go all-in, here are the 3 main assumptions in TA that you should know:
1. The market discounts everything.
This is one of the strongest assumptions in TA. Here, we assume that all publicly available information is already “priced-in” or reflected in the stock price.
Our assumption is that when market players get information, they react to it by either buying or selling shares. Because of this, supply and demand will immediately adjust along with the stock’s price.
Any news, disclosures, or announcements won’t matter anymore because the market is always a step ahead. You can never have any “new” information that the market didn’t already account for,
2. Prices move in trends.
Technical analysts believe that price movements are not random. They will always move in some general direction, whether upward, downward, or sideways.
For example, if a certain stock’s price is increasing, then it is more likely that the price will continue to increase. If the price is going down, then it is more likely that the price will continue to go down.
The trend can be short-, medium-, or long-term, but prices always tend to move in one direction and are more likely to continue that trend rather than move randomly.
3. History repeats itself.
People behave in a predictable way. Because of this, similar events and information are usually met with similar reactions. Bad earnings will make people want to sell, expansion plans will make people want to buy, and so on.
This allows us to use past market data and chart patterns to predict future price movements and market behavior.
Basic Concepts in Technical Analysis
Now that you know a bit more about technical analysis and the assumptions behind it, let’s cover some of the basic concepts in TA. Each of these concepts can be a full article on its own, but for now we’ll just run through the most important facts to get you started.
1. Support and Resistance
Support and resistance are two of the most basic concepts in technical analysis. You can already use them to make trading decisions, but they also form the foundation of more complex strategies and trading systems.
Support is the price that, historically, a stock has had difficulty falling below. This is the point where the market considers the price to be “cheap”. Demand becomes so strong that it stops the price from going any lower. In other words, marami nang gustong bumili kaya ‘di na masyado bumababa yung presyo.
Resistance is simply the opposite of support. This is the point where the stock price usually starts going down because there is too much supply and not enough demand. Masyadong marami nang gusto magbenta kaya bumababa yung presyo.
Support and resistance levels are not always precise and they can be broken, but it’s a simple and proven concept that many find useful. The basic rule when trading using support and resistance is to buy on support and sell on resistance.
2. Trend Analysis
There are always going to be ups and downs in the stock market and in every stock, but these ups and downs will eventually form a trend that moves in some general direction—this is actually one of the key assumptions of TA that we discussed above.
There are 3 basic types of trends:
Uptrend
Identified by a series of higher highs and higher lows. The general movement over time is going upward.
Downtrend
Identified by a series of lower highs and lower lows. The general movement over time is going downward.
Sideways
There is no clear pattern going upward or downward. The general movement over time is horizontal or flat.
Similar to support and resistance, trends are not guaranteed to continue to hold. That’s why they can be further classified into short-, medium-, and long-term trends. Trends can and do change. But unless something happens to change the market behavior, then the trend is likely to continue.
The general rule of thumb? Buy stocks on an uptrend. Avoid stocks on a downtrend.
3. Volume
A lot of technical analysis involves looking at the stock price, but that’s not the only important statistic in TA. Another equally important, if not more important, number to look at is the trading volume.
The trading volume tells you the number of shares that were bought and sold in a particular time frame (usually a day). You can see the volume shown as a bar graph at the bottom of the stock chart.
Volume is important because it gives context to price movements. It tells you how strong or weak a trend or chart pattern is.
For example: If the price of a downtrending stock starts going up, does it mean the trend changed to an uptrend? Take a look at the volume and you’ll find out. If the volume is low, then the trend will probably continue going down. If the trading volume is high, it means that there is a strong demand for the stock and the trend will likely change to an uptrend.
The rule of thumb? Kung high volume, push mo na. Kung low volume, ingat muna.
4. CHART PATTERNS
There are many kinds of charts that traders can use to monitor the stock market, but the most popular is probably the candlestick chart.
A candlestick chart shows four key prices for the day—the opening price, closing price, highest price, and lowest price. These are based on that day’s completed transactions.
If the candle is green, it means that the closing price was higher than the opening price. If it is red, it means the opening price was higher than the closing price.
The colors might change depending on the chart you’re using, but one color will always show an increase in price over the day and another color will show a decrease in price.
Once you understand how to read charts, then you can also start seeing patterns forming. Because TA assumes that history repeats itself, we can use past patterns to predict future movements in the market.
Here are some basic chart patterns:
Head and Shoulders A “head and shoulders” means that there are 3 peaks in your chart pattern—the middle peak is the highest (head) with two relatively equal lower peaks beside it (shoulders). This pattern signals a trend reversal, with the line connecting the two “shoulders” as the key support level to watch. If you see the price break below that level, expect a trend reversal or breakdown of the stock. An inverse head and shoulders may also signal that a downtrending stock is about to change to an uptrend.
Cup and Handle A “cup and handle” forms when, after an uptrend, the chart forms a large U-shaped curve (the “cup”) followed by a smaller dip before continuing upward (the “handle”). This pattern signals that the the stock is bullish. If the pattern is completed, the price will likely resume its previous upward trend. If the right side of the handle breaks above the peak formed between the cup and the handle, it confirms that the pattern is complete and that the uptrend will resume.
Double Top or Double Bottom A “double top” or “double bottom” forms when a stock hits its existing support or resistance level two times without breaking through. After the second peak or valley, watch out to see if the chart breaks the key support or resistance level. If it does, you will likely see it continue all the way up or down, forming a trend reversal.
5. Moving Averages
There are many types of moving averages used in technical analysis, but they all have one intention—to remove day-to-day price fluctuations and make chart analysis easier. Moving averages allow us to plot smoother lines that show trends and patterns more clearly.
One of the most popular types of moving averages is the simple moving average (SMA). We’ll focus on this for now.
To find the simple moving average, just get the sum of all the prices in a certain period and divide it by the number of prices you added up. The most common periods used in TA are the last 20, 50, 100, or 200 trading days but you can really use any period you want.
You can use these moving averages to determine support and resistance levels and to identify trend reversals.
A long-term moving average, like the 200-day moving average, is often used as a basis for the stock’s support or resistance. It shows the general trend that the stock has been moving in.
A short-term moving average, like the 20-day moving average, shows how the stock is performing now . When compared to the long-term moving average, it shows to how the stock is performing compared to its past performance.
If the short-term SMA line rises above the long-term SMA line, you should buy stocks because it means the trend is going upward.
If the short-term SMA line falls below the long-term SMA line, you should sell your stocks because it means the trend is going downward.
Conclusion
We talked about a lot in this article, but we barely scratched the surface of technical analysis! As you practice trading, you will learn how to combine these concepts and turn them into practical and useful trading strategies.
Stay tuned as we dive deeper into each of the concepts in our next articles and subscribe to InvestaDaily for more investing tips and stock market advice!
In the meantime, try applying the concepts above in your trading! Leave your comments below and update us on how you’re doing. 🙂
In our first video, we taught you the basics of how to read stock charts. We explained candlesticks, trend lines, and support and resistance.
Now, we’ll dive deeper into support and resistance—the backbone of all price structure analysis methods in technical analysis.
Watch the video above to learn how mastering support and resistance can make you a more profitable trader. We’ll also teach you about breakouts, breakdowns, and role reversals—when resistance becomes support or support becomes resistance. This will help you predict the best time to buy and sell.
This video is in a mixture of Filipino and English.
Subscribe to InvestaDaily for more investing tips and stock market advice, or sign up for Investagrams to access special features to help you reach your first million.
Whatever your investing style, knowing how to read stock charts is a skill that is sure to help you succeed in the stock market.
Watch this short tutorial video to learn the basic ways to read a stock chart—including how to read candlesticks, identifying trend lines, finding the support and resistance, and spotting breakouts or breakdowns. All of these will help you understand charts better and make more informed trades.
This video discusses technical analysis concepts in a mixture of Filipino and English.
Subscribe to InvestaDaily for more investing tips and stock market advice, or sign up for Investagrams to access special features to help you reach your first million.
In general, there are two sides when it comes to stock market analysis—fundamentalanalysis and technical analysis. Today we’ll discuss both methods and explain their advantages and disadvantages.
**Before we begin, you may want to check out these basic terms to help you understand this article better.
What are fundamental analysis and technical analysis?
Fundamental analysis a method of stock market analysis where investors study the intrinsic value of a stock (A.K.A. what it should cost) based on a variety of factors. Decisions on whether to buy, sell, or hold a stock are based on comparing the intrinsic value to the market price. Fundamental analysis is generally less structured than technical analysis and is used most by long-term investors.
Technical analysis, on the other hand, is easier to apply to short-term stock trading. This method uses historical data on price, volume, and other statistics to predict future price movements. Stock charts are commonly used in technical analysis to track and analyze patterns that can predict price movement.
In reality, most traders will use a combination of these two methods. A general rule of thumb is that fundamental analysis will help you determine which companies to invest in, while technical analysis will help you determine when you should buy and sell shares of these companies.
So how do each of these methods work? Let’s take a deeper look.
How does fundamental analysis work?
In fundamental analysis, our objective is to assess the company’s performance and stability—basically whether it is a good business or not. This includes looking at financial statements, its performance compared to others in the same industry, news that may affect the company’s operations, and more.
When looking at the financial statements, one of the most important indicators is the company’s net income. We’re not talking about NGO’s or charities after all. In the stock market, a company needs to be making money to be valuable. However, you should remember that a company’s income only shows one part of the picture.
Using a combination of financial statements and news, you can answer more complex questions such as: Are the company’s expenses high compared to the industry average? What amount of its earnings are retained and reinvested into the company? Are they constantly improving their product or service? What are their plans for the future and will these plans increase or decrease their value? What risks are they taking are you willing to take on the same risk?
There is no single way to do fundamental analysis, but at the end of the day there is one question every fundamentalist is trying to answer: Is this a business that I want to put my money into?
How does technical analysis work?
In technical analysis, people focus more on identifying trends and chart patterns rather than the company’s intrinsic value. The underlying idea here is that a stock’s market value is not always determined by its intrinsic value. Especially in the short term, a stock’s price is mostly influenced by external factors such as market sentiment. Patterns and trends can be identified based on historical data, and this is what allows us to predict how sellers and buyers (read: supply and demand) will react.
There is a long list of tried and tested techniques for performing technical analysis, but there are far too many for us to cover in one article. Some of the most basic methods include:
Identifying chart patterns such as the cup and handles, head and shoulders, ascending triangle, etc.
Assessing the market sentiment based on price movement, volume, moving averages, etc.
Identifying and riding trends until your preferred indicators signal otherwise
Whatever your preferred methods for technical analysis, the objective remains the same: To capitalize on patterns formed by the unified emotions and reactions of market players.
So which is better, fundamental analysis or technical analysis?
While everyone has their own preferences, neither method is really better than the other. That’s why they both exist! Each method of analysis has strengths and weaknesses. It’s just a matter of finding your own fit.
If you want to invest long-term, then you might want to go for a more fundamental approach. You’ll have to do more work initially, but you won’t be as sensitive to the day-to-day price fluctuations. If you are able to buy an undervalued stock, all those ups and downs will still result in an overall price increase and profit for you.
If you’re going for a short-term investment, then technical analysis might be a better option. Because prices tend to fluctuate, patterns in price movement will more accurately predict the stock price tomorrow or next week. The emotions and reactions of market players have a bigger impact on short-term investments because there isn’t enough time for the ups and downs to average out—unlike in long-term investments.
In reality, most traders use a mix of fundamental and technical analysis to manage their portfolios. This allows them to see the complete picture and make more informed trades. Information, after all, is power. Nowhere is that statement more true than it is in the stock market.
Our advice?
The more knowledge you have, the better. Learning both fundamental and technical analysis will not only help you make better decisions, but also give you more confidence in yourself and your trades. This will prevent you from giving into hyped up stocks or selling your stocks too early because you doubted yourself. It will also allow you to start building your own stock trading system and strategy—the foundation of any trader trying to make money in the stock market.
Even if you eventually become a pure fundamental or technical trader, you won’t know which method works best for you if you don’t try them both first! You may even use one method to validate your analysis using the other. So give both methods a try, and tell us about your experience in the comments below.
Got any questions? Leave a comment below!
Subscribe to InvestaDaily for more articles like these, or sign up for Investagrams to access special features to help you reach your first million.
