It was 1999, a time of whirring floppy disks, sagging JNCO jeans and an overabundance of boy bands in coordinated all-white outfits crooning with outstretched hands…
The dot-com bubble was at its peak, and Marc was watching as his “garbage” internet stock doubled. He had dollar signs in his eyes.
Marc was simultaneously house hunting in San Francisco’s pricy market. He thought for sure his new internet stock would set him up for a down payment on a home. His hopes were high.
He made the error of letting emotions cloud his judgment.
When the stock began to slip – then stumble – Marc’s dream of owning the perfect home in the perfect housing market led him to hold on… until the stock tanked… to zero.
Afterward, Marc realized he needed a strategy that gave clear indications for when to enter and exit his trades, all while cutting emotion out of his buy and sell decisions.
That’s when Marc discovered technical analysis, or the study of stock charts – visual representations of investor fear and greed.
Knowledge of technical indicators – like resistance, the price level at which a stock’s rising price meets resistance, and support, the price level at which a stock’s downtrends reverse – would have shown Marc that investor sentiment for his internet stock had fundamentally changed.
When “zones” of resistance or support are broken, we know investor psychology has shifted. A break above a long-standing price of resistance signals that interest is swelling, while a dip below support shows that investor interest is drying up.
Simply put, familiarity with resistance and support can cut emotion out of your trades and minimize your losses and maximize your gains.
Don’t learn Marc’s lesson the hard way…