Can you use support/resistance levels for shares?
Even though when it comes for share trading, we hear about the use of economic factors for trading decision making, there are proofs that show other technical methodologies can be applied effectively.
The idea of “value investing” is a few centuries old and had become popular thanks to Benjamin Graham, the author of the book with the same name. Warren Buffet is the most successful investors who managed to apply Graham’s principles and is now between the most successful people in the world.
Even though Buffet is not a huge fan of technical trading, not had mentioned itself that “just looking at the chart is not investing” , our opinion is that technical and fundamental factors can be used together in order to come out with an effective trading strategy.
Can you really use support/resistance levels for shares as well?
We hope you will find the answer in the following sentences. Let us take an actual example in order to have a proof for our assumption.
Above you can see a chart of the Amazon share. To begin with the actual price action context, this particular asset had an incredible performance since late October 2017, being up by more than 50%. We’ve drawn on the chart three support levels to which the market had been reacted. First, we have the 1084 level, which had been broken, tested and the trend continued higher.
The same happened with 1280 and 1475. Since we have three similar situations on the same chart that proves support/resistance levels can be applied to share trading, as well.
However, there are a few mentions to make:
- Using support and resistance levels can be highly effective if applied for liquid shares. We’ve given Amazon as example, but other big public companies can fit as well. High liquidity means that there are a lot of investors looking at particular levels, which helps the formation of price swings around them.
- Same with other markets, support and resistance levels should be used for with-trend trading in order to have more profitable trades. Especially if you are at the beginning with share trading, using support and resistance levels with-trend will be the best for you.
With that being said, we’ve shown an actual example that proves we can use technical analysis for shares as well. That does not mean we have to ignore the fundamentals, though.
Stock trading carries high risk and may not be suitable for everyone. You should carefully consider before deciding to invest in speculative assets. No information contained in this article should be regarded as a decision to buy a certain asset.