There are two ways traders can profit from stocks trading within a well-defined range. The first is to "trade the range." The second way is to "trade the breakout."
As you can see on the chart, shares of Meta Platforms, Inc. (NASDAQ:META) are trading within a range. The top of the range is the resistance around $480.00 and the bottom is support around $462.00.
Trading the range would be to sell if the price gets close to $480.00 and to buy if the price gets close to $462.00.
The top of a trading range is a resistance level. And sometimes when stocks reach resistance they tend to reverse and head lower. This happens when some of the investors and traders who created the resistance with their sell orders start to undercut each other.
They know buyers will go to whoever is willing to sell at the lowest price. They don't want to miss out, so they reduce the prices at which they are willing to sell. Others see this and do the same. This results in a snowball effect which can push the price lower.
The bottom of a trading range is a support level. Sometimes when stocks drop to support, they reverse and rally. This occurs when some investors and traders who created the support with their buy orders worry that they will miss the trade.
They know sellers will go to whoever is willing to pay the highest price. They don't want to miss the trade, so they increase the prices they are willing to pay. Others see this and do the same. It results in a bidding war that can push the price higher.
Trading the range would be to buy if the price moves above $480.00 and to sell if the price drops below $462.00.
If Meta is above $480.00, it could mean the people who created the resistance with their sell orders have left the market. They have finished or canceled their orders.
This means those who want to buy will need to bid premium prices to attract sellers off of the sidelines. This could force the price higher.
If Meta is above $462.00, it may mean that the people who created the support with their buy orders have left the market. They have finished or canceled their orders.
This means people who want to sell will need to offer their shares out at a discount to draw buyers off of the sidelines. This could force the shares into a downtrend.
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