So far, we’ve covered the importance of market timing and the need to trade according to the current trend. But when exactly should you be buying or selling a security? This brings us to the topic of support and resistance zones.

Support and resistance zones are like invisible lines on a price chart which prices and traders react to. They signal a great opportunity to either enter or exit a trade. These zones usually correspond with the pattern by which a particular security has moved in the past. For instance, let’s say a stock reaches a certain price level before declining, it goes down for about a year before hitting its bottom and turning back up again.

The next time that stock approaches, the price at which it first began to decline, some investors will start to sell it off, anticipating that it will decline once again. This is how a resistance zone is created. On the other hand, when that stock approaches the price at which at last turned around, many investors will step in and buy it, creating a support zone. Securities sit in these zones temporarily, while buyers and sellers try to figure out whether to jump in or jump out of the market. The key is to watch carefully how prices react in the support or resistance zone because eventually, one of two things will happen.

The zone will either hold and the price will reverse direction or the security will break through and continue on its trajectory. It’s important to note that breakthroughs have the tendency to recalibrate a security support and resistance zones. For example, often times when a security breaks through a resistance zone that same level becomes its support zone during the next cycle. That’s because of all the investors who missed the chance to benefit last time around and are looking to either buy the security for cheap or sell it before it declines.

As a trader, it’s important to learn how to identify the support and resistance zones for a particular security once you’ve figured out where those zones are, you should then make your buying and selling decisions near those zones. That will provide you with a market edge, allowing you to achieve greater success over the short and long term.

If you want to make money by timing the stock market you need to follow the trends.

Buying and selling creates its own momentum and a market that’s moving up or down is likely to keep moving in that direction for a certain period of time.

What this means is that you should avoid trading against the current trend.

For example, when the market is bearish and heading down, don’t try to predict which stocks have hit bottom, that would be like trying to catch a falling knife.

Instead, find an objective way to both identify the current trend and decipher when that trend has changed too, because just like the saying goes, “the trend is your friend, except at the end”.

So, let’s explore two simple techniques for identifying market trends.

The most common ways to look at the nature of a trend’s movement. As a stock moves up or down, it rarely does so in a straight line, rather it zigzags forming a series of highs and lows.

If the highs keep getting higher and the lows keep getting higher that stock is in an uptrend. If the highs get lower and the lows get lower, you’re looking at a downtrend. And if the highs and lows are consistent over a certain period, it’s in a sideways trend.

Another way to identify the market trend is to look beyond the daily price fluctuations and determine the general direction of a stock.

You do this by calculating an average. For example, a 20-day simple moving average or an SMA, is an average of the past 20 days of closing prices, which moves or updates on a daily basis by incorporating the latest prices.

If the SMA is sloping upwards, that’s an uptrend; sloping down downtrend and sideways, means flat.

A 20-day SMA gives a good picture of the short-term trend but you can also use other periods like the 50-day SMA and the 200-day SMA for the long-term trend. Those aren’t the only moving averages, however, there’s the exponential moving average or EMA, and the weighted moving average or WMA, which gives more weight to recent prices.

As a trader, you can use any of these techniques individually, but for the most accurate picture of market trends, you should use them all.

Because when it comes to behavioral analysis, the best way to increase your chances of success, is to consider as much data as possible.

So that’s market timing! Next, let’s cover support and resistance zones.