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

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%)

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.

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.

comments powered by Disqus
Trading Center