When the price hits a support or resistance level and then reverses direction it’s called a bounce. Therefore when you see the price of a stock nearing support levels it might be time to buy. The more solid the support level is the more confidence you might have it could bounce back up. On the other hand, if the price reaches resistance levels it might be time to sell.
However, support and resistance levels aren’t hard stops for prices. When a stock moves beyond previous limits it’s called a breakout. If an upward trending stock breaks resistance, the old resistance level often becomes the new support level. After a breakout, some investors might see this as a good place to sell because it’s a break-even point. Others may see this as a good place to buy believing the stock will rally and climb higher once again. Depending on the investor and if they’re bearish or bullish, support and resistance levels can be used in different ways.
A bullish investor uses support for buy signals hoping the stock will rally and breakthrough resistance. while a bearish investor streames resistance levels waiting to buy a short position and hopes to profit from the stocks declined. How you use to support and resistance levels as buy and sell signals depends on the type of investor you are. For example, very active investors like swing traders use these levels to buy and sell often possibly even on the same day.
Why less active trend traders can simply use breakouts to confirm a trends direction. Support and resistance are basic concepts of technical analysis. Some investors are comfortable making trading decisions using only support and resistance while others prefer coupling it with other technical analysis tools and techniques. No matter what your investing strategy is understanding support and resistance makes you better equipped to take on the market no matter which way it’s trending.