Hundreds of different technical analysis indicators and oscillators are at your fingertips today that you can use to set up your most profitable trades. And hundreds more are introduced every year.
Here’s the problem…
Trying to chart all of them is not only useless – it could also hurt your trades. You end up looking at such an intricate, spider web of a mess on your screen that you can’t even see the price of the stock you’re tracking.
But there’s a very easy fix to this…
Instead of combining every technical tool you’ve ever come across, there’s really only two you need.
Both of these actually lay the groundwork for every trading decision you’ll ever need to make.
And unlike the others, they allow you to track stock price movements and patterns in real time.
Here’s the first one…
Using Support and Resistance to Track Stock Prices in Real Time
1. Support
Support is the price point on a stock chart at which the underlying stock or exchange traded fund (ETF) gets “supported” from moving any lower in price. It reflects the level of demand and is the price at which buyers come in to accumulate the stock or ETF. You can think of it as the “line in the sand” where investors can get conviction for the asset they’re buying (and the amount they’re buying).
When the price reaches support, the demand for the stock or ETF typically outweighs the supply, as investors will want to buy it for cheap while sellers will want to wait until the price rises before selling. And if you have more people buying than selling, the price will eventually be driven higher off the support level where it can then be sold for profits.
Keep in mind that, like anything else in the markets, nothing is ever certain. So while support generally holds the stock or ETF from trading lower, it can break. When this happens, it signals that investors are either willing to sell at lower prices or are unwilling to buy at even the “cheapest” prices. And once the stock or ETF breaks through support, a new support level is eventually created.
Here’s an example of where the support is on a stock chart:
2. Resistance
Resistance is the price point on a stock chart at which the underlying stock or ETF “resists” moving any higher in price. It reflects the level of demand and is the price at which investors capitalize on selling the stock or ETF for profits. Like support, resistance is like the line drawn in the sand where investors can get conviction for the asset they’re selling (and how much of it they’re selling).
Once the price reaches resistance, supply typically outweighs demand, as investors will want to wait until the price drops before before buying. And when you have more people selling than buying, the price will eventually be driven down from the resistance level where people can start buying it again.
As I said above… resistance can be broken. And when this happens, it signals that investors are either willing to buy the stock or ETF at higher prices or aren’t willing (for whatever reason) to sell it at even the “highest” prices. Once the price breaks through, a new resistance level eventually forms.
Here’s an example of what this looks like on a price chart:
Support and resistance levels are the best technical indicators to use because they’re not “lagging indicators,” meaning they give you the price movements in real time. Lagging indicators, on the other hand, give you this information AFTER it’s already happened and only tell you why it happened. And this, of course, is far less helpful to you or your portfolio.
Now I’ve got my own proprietary tools that I use to track support levels. But you can easily track support and resistance using most charting websites out there, like www.stockcharts.com. These sites typically offer tools and features in which you can draw and save the pricing movements on the chart. That allows you to set or adjust your trades according to the current movement of stock and where the stock might be headed.
Good trading,
Tom Gentile
