Investment: Technical Analysis basics 4

Introduction to Trading ranges

Trading ranges are important in determining support and resistance as either turning points or continuation patterns. A trading range is a period when prices move within a relatively tight range. This signals that supply and demand are evenly balanced. When the price breaks out of the trading range, this signals that a winner has emerged here, where a break above is a victory for the “bulls” and a break below is a victory for the “bears”.

It is sometimes useful to create support and resistance zones. Each security has its own characteristics; analysis should reflect the securities’ intricacies. Sometimes exact support and resistance levels are best, and sometimes zones are better. Again, the tighter the range, the more exact the level. If the trading price range spans less than, say, 2 months and the price range is tight, more exact support and resistance levels are best. If a trading range spans months and the price range is relatively large, it is best to use support and resistance zones.

Identification of key support and resistance levels is essential to technical analysis. It is difficult to establish exact support and resistance levels. However, being aware of their existence and location enhances analysis and forecasting. If a security is approaching a support level, it comes to remind us to look for signs of increased buying pressure and a potential reversal of price. If a security is approaching a resistance level, it can tell us to look for signs of increased selling pressure and potential reversal of the price. If a support or resistance level is broken, the relationship between supply and demand has changed again. A resistance breakout signals that demand has won; conversely, a support break signals that supply has won.