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What is the Technical Analysis of Stocks

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In any economy, one thing is certain: the beginner investor is alive and well. In boom economies, this investor is filled with rampant enthusiasm and a desire to strike while the market is “hot” in order to get the maximum value possible. In recessionary economies, the beginner investor is still filled with rampant enthusiasm, albeit from a much different perspective. They are looking to come into the market while it’s down and make out like thieves in the night when it rises again. Perfect prediction is outside the capability of any human-created system, but the system of technical analysis allows us to come pretty close.

Technical analysis, in a nutshell, is analyzing stock charts. However, this is a much denser, thicker “nut” than meets the eye. Here is a general overview of how to get started with technical analysis.

Support and Resistance: The Volatile Meeting of Supply and Demand

Is there any facet of investing where supply and demand don’t make an appearance? Not a chance. Understanding support and resistance is one of the first steps of being able to properly interpret a stock chart, which is a little different than a stock listing. Basically, support is the point where the price is “just right”, much like the porridge from the old fairy tale. Support is a good thing — this is the price where demand is steady enough to keep the price from dropping. On the other side of the coin, resistance is the level where price isn’t likely to go higher. If support is “just right”, then resistance can be thought of as “too cold” — too cold to buy, that is. These two concepts work together to help investors decide when to buy and when to sell.

Are they an exact science? Absolutely not — as price movements become more volatile, it’s difficult to actually pinpoint a precise support and resistance calculation. Approximation is the name of the game when it comes to technical analysis.

Revealing Support and Resistance for the First Time

So, how do we calculate these two important factors? We have to study the historical highs and lows on the chart and look for common peaks and dips. For measuring support, we look at the lowest point, since we’re looking for the point at which price cannot go any lower. For measuring resistance, we look at the highest point in the range, since we’re looking for the point at which the price cannot go any higher.

The goal of any gentle introduction is to slowly ease you into a concept that’s greater than the scope of one article or even a full series — technical analysis is a skill that will take time to master, but understanding support and resistance is required in order to move on to more complex topics. The best way to ease into this is to do a little paper trading, taking a few stocks and measuring the support and resistance levels using historical data of at least 3 months to ensure you’re getting the clearest picture possible. Six months may be even better for a different perspective, but a year is a little too much for the beginning investor. Go try it today!

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