How can I determine a stock's next resistance level or target price?

By Casey Murphy AAA
A:

Determining where the price of an asset will stop once it has created a new high is one of the most difficult tasks for any trader. There is no magic way to determine what price an asset is likely to reach, but technical traders have developed a number of methods that can at least give you a fairly good estimate.

Fibonacci Extension
This tool is used by technical traders to forecast potential areas of support or resistance. First plot the high and the low, in this case $45 and $36. This 9 dollar range is now the 100% to 0% range. Extensions consist of all Fibonacci retracement levels that exceed the standard 100% level. Fibonacci extensions predict that a move will advance until it reaches the 161.8% or 261.8% Fibonacci resistance levels and then reverse its direction. As you can see in Figure 1, once the price breaks above $45 (100%), a trader will set his or her initial target at $50 (161.8% of our $9 range) above the starting point of $36, and the secondary target at $59 (261.8%)

Extension.gif
Figure 1

Chart patterns
One of the most common methods of setting a target price is achieved by first identifying a technical chart pattern. After the pattern is identified, price targets can be set by measuring the height of the pattern and then by adding it to (or subtracting it from) the breakout price. For example, as you can see in Figure 2, the height of the ascending triangle is added to the breakout price to determine a potential area of future resistance.

pricetarget.gif
Figure 2

As you know, nothing is guaranteed in the financial markets and there is no magic way to determine future resistance. The tools mentioned above may give you a better idea of where to set price targets, but don't solely rely on these - they may not always work.

To learn more, see Fibonacci And The Golden Ratio and Trading On Support.

RELATED FAQS

  1. How do I invest or trade market indicators?

    Read about how investors can trade actual market indicators, such as the S&P 500 Index, rather than specific stocks or commodities.
  2. What are the most common market indicators forex traders follow?

    Learn the most common technical indicators that forex traders and currency market analysts utilize to predict likely market ...
  3. What is a common strategy traders implement when using the Wide-Ranging Days pattern?

    Learn about wide-ranging days and how traders use this single-session candlestick pattern to predict trend reversal and create ...
  4. What are the most common market indicators to follow the Indian stock market and ...

    Learn about the most common market indicators used to follow the Indian stock market, including its two major exchanges: ...
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    How do I invest or trade market indicators?

  2. Chart Advisor

    Is Now the Time to Invest in North America?

  3. Chart Advisor

    These Oil Service Stocks Are Ready For ...

  4. Trading Strategies

    The Top Five Stocks For Novice Swing ...

  5. Options & Futures

    Advantages Of Trading Futures Over Stocks

Trading Center