There are many arguments about whether or not technical analysis of stock charts is really relevant. The fundamentals of trading are more important when trading the blue chips stocks or the major ones, but technical analysis works best for penny stocks given that we don’t have too much time to spare due to the rate of this market. We better off using Technical Analysis because our market is moving so fast we won’t have time to use the fundamentals, or else we may not have time to trade.
Today I will focus on “Resistance level” as there are many other aspects in Technical Analysis. Resistance level has proved to be very effective when it’s used the right way. What is a resistance in stock charts? Stock charts are said to have a resistance level when the stock is unable to trade above a specific price. For example, a stock is trading at $2.00 per share every time it hit $2.50 it goes back down in price on several occasions. This is because it has a resistance at $2.50.
What’s The Cause of Resistance Levels in Stock Charts?
Resistance levels occur when the stock increases in selling pressure. It may also be the result of the laws of supply and demand. Because as the stock’s price increases more shareholders want to sell and get their profit, while fewer traders are interested in owning from this stock. This causes the price to go down in trend, thus the resistance level has been reached.
Why Does Resistance Level Matter?
This is an interesting question because not all traders use this analysis. The reason they may not be using it might be due to now knowing how to spot it, or they might have no idea if it’s existed. You are pretty lucky you find this article, which should give you an edge on those traders and the market.
Many penny stocks traders use resistance levels to know when to buy and when to sell. You may have already seen where I’m going with this, because it’s pretty easy to see once you know the definition of a resistance level.
Since the resistance level is where the stock’s price usually plateau followed by a down-trend, you would want to sell before this happens. If you don’t sell then you risk of losing your profit, since there’s a great chance that the price would go back to its initial value.
Furthermore, the resistance level in stock charts enables traders to know when to take on some positions on a stock. Knowing the resistance level means that you know when it might be going down, you will never want to buy shares while a stock is at its resistance point. Instead, you will wait until it descends from the resistance level to make your move.
Now, if I was to ask, “Do you think knowing the resistance level of a stock is necessary?” I think your answer would have been “Yes.” Because it is clearly a good strategy to use to give you more chance in this dangerous and unstable market.