Wednesday, December 12, 2012

Waiting to buy (or sell)

So I wanted to quickly touch on a subject that I thought was completely ludicrous when I first started looking at technical analysis as a possible investment strategy: the breakout.
Stocks move in trends and trading ranges with corresponding support and resistance levels. On most occasions, attempts to break an existing level fails, whether it is support or resistance. These are characterized as false breakouts. A false breakout is when the price moves through the level only to see the move fade late in the day.
False breakouts happen more often than not. That is why a close beyond the level is important. It is also why markets/stocks trade in trading ranges a good bit of the time. These levels have numerous shares traded at these prices over time and moving past them is a pretty big feat. The longer an investment or index stays at a certain level the more difficult it is to get past it. Once it does occur the liklihood that the investment/index pushes back through the level is unlikely.
As you can imagine a good number of people tend to buy before the resistance level is taken out. As a result, most people end up buying high and selling low.

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