First off, let me calm you down.
The phrase “Technical Analysis” might sound daunting, but it’s not.
In fact, it can be surprisingly simple.
Of course, as a long-term investor, you could go without one and still have satisfactory returns.
However, by implementing the technical analysis in your decision-making process, those gains can be much higher.
Why buy or sell a stock at a random price, if you could do it at an optimal price.
Especially when all you have to do is follow this basic and straightforward principle.
The Only Technical Analysis Principle You’ll Ever Need To Learn
Google technical analysis and what you’ll find are hundreds of different indicators.
Relative strength index, moving averages, Bollinger bands, Ichimoku cloud, MACD, and so on. Quite overwhelming if you ask me.
However, what I’ve found in all my years of playing the markets is that those are quite insignificant.
All you need to focus on is something we call support and resistance lines, and they’re remarkably simple to understand.
Here’s a graphic representation how those look like.
This picture shows the price rising for a while, but then hitting a level it couldn’t surpass despite trying numerous times. It’s almost like there’s an invisible line preventing further moves to the upside. This is what we call resistance.
Conversely, the price in the picture is having trouble falling below a certain level. Another invisible line. We call that support.
Open any random stock chart, and you’ll see these two invisible lines in action.
Here’s one recent example.
As you can see, the price is clearly moving within a well-defined range between two invisible lines (which I made visible) representing support and resistance.
Something you have to note is that, in reality, the price will never rebound precisely from the support and resistance lines. This is also evident in the above example. Nonetheless, it will do so close enough for these to matter.
Moreover, support and resistance lines don’t necessarily need to be horizontal. They are also important when the price is trending upwards or downwards.
Here’s an example of this.
As you can see, the price is moving higher, but it’s doing so in a well-defined channel. Accelerating near the support line, and decelerating at resistance.
Now that you know what to look for, let’s see how these magical lines can help you make better investing decisions.
How To Buy Low And Sell High Using Support And Resistance
First, you should understand this—technical analysis is not perfect. Its purpose is to act as a support mechanism.
Then, you must prepare a thorough fundamental analysis—why you think a stock or an asset will appreciate.
Technical analysis is there only to help you find the best entry point, so you can maximize your profits.
Here are a few examples.
Let’s say you’re bullish on a stock and want to buy.
The way you want to use technical analysis is to buy when the price is near the support line.
That’s because there’s a high probability the price will rebound of that level as it did in the past.
This also makes sure you buy at the lowest price available within that specific time frame.
This strategy is applicable both when the price is ranging sideways, as well as when it is trending upwards.
Let’s look at another scenario.
I’m again bullish on a stock, but with the price ranging sideways, I’m not sure if the rest of the market feels the same way. After all, I don’t want to invest in something that’s not making me any money.
The way you can use technical analysis here is to wait for the price to break above the resistance line.
When it does, it indicates that there are more buyers than sellers for this stock, making it a bullish signal.
It also typically marks the start of a new uptrend. This makes the breakout one of the most powerful signals on the market because you’re entering a new rally at the very beginning.
The third and final example I’m going to mention is about finding the perfect exit point.
Let’s say you’ve held a stock for a while and wish to sell it. Maybe you’ve found a better investment, or simply don’t feel like the prospects for the company are as promising.
There are two ways to do this.
First, let’s say you’ve decided to sell, but would prefer to wait for the stock to reach its peak.
In this case, you should wait for the price to break below the support line, be it in an uptrend or ranging sideways.
That would signal that the momentum is shifting downwards and that there’s little chance of price appreciating.
If, however, you’d like to sell ASAP, but still want to do it at the most optimal price, then wait for the stock to reach the resistance line, and sell then. In the short term, that’s probably as far as it will go, since it has reversed at resistance before.
You can apply these two sell signals in both an uptrend and sideways ranging movements.
The Price Of This Asset Just Made A Major Breakout
Believe it or not, but support and resistance are the only two technical tools I use. They’re just so much better and clearer than everything else.
Recently, these have helped me identify an underappreciated investment with massive upside potential.
And best of all, the uptrend has just started, making this the perfect buying opportunity.
Good investing,
Leon Wilfan
