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Using Trend Lines - Lines of Support & Resistance

Two of the most important trend lines are Support and Resistance. A Support Line represents the bottom price a stock will normally reach, while a Resistance Line represents the top price a stock will normally reach.


    Above, you can see both examples of Support and Resistance lines. The Support line is recognized at just above $460 and is determined by the bottom points on the chart. In this case, the stock price hit the Support line about five times. The Resistance line is just above $580 and is determined by the two peaks in which the stock hit that price. 

    Recognizing trend lines is very important for determining a stock's relative price and direction. In most cases, if a stock hits its Support line, it is cheap and will reverse upwards. On the other hand, a stock is usually considered expensive if its price it the Resistance line and it can be expected to reverse downwards. 

    A question some may be asking is, "What if the stock price reaches above resistance or below support?" This is called a breakout. When a breakout occurs and the stock price continues to move outside of the trend lines, the price usually undergoes an extreme change in the direction outside of its trend line. For example, if a stock breaks above its Resistance line, you can expect it to significantly increase in the near future. However, if a stock breaks out below its Support line, you can expect it to significantly decrease in the near future. This can be used to buy a stock with lots of upwards momentum, or sell out of your position before it drops massively.

    All in all, trend lines are one of the most important tools investors use to determine a stock's relative price and future direction. Utilizing trend lines can help you become a much more successful investor and earn yourself lots of more money.

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