Trading Range
During periods of consolidation, a trading range can develop. Financial instruments will tend to trade within the prices encompassed by the trading range.
A resistance line is drawn across the top of a trading range, where there has been a series of closing prices that have not broken upward through the resistance line. This may represent a price where a lot of people previously bought the security. If it traded down, then back up to this level, many people may decide to exit the trade so that they don't take a loss. Action of this nature builds the resistance line. Technical analysts look for a breakout upward through the resistance line to produce a buy signal, if the movement is sustained.
A support line is drawn across the bottom of a trading range, where there has been a series of closing prices that have not broken downward through the support line. Technical analysts look for a breakout downward through the support line to produce a sell signal if the movement is sustained. High volume helps to confirm the breakout, while low volume indicates the breakout may not be sustained. Breakouts can sometimes be predicted, while in the trading range. Higher volume at peaks signal that an upward breakout is more probable. Higher volume at the dips signals a downward breakout is more probable.
You can increase your profits in option trading by considering both fundamental and technical analysis.
When you are analyzing potential option positions, it
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