The current economic turmoil has left a lot of investors and traders with portfolios that have seen huge devaluations. This feature explores how traders can make money from stock markets going down. I propose that traders can make money, on UK companies, when they are falling in value.
This shorter than normal post is not for the faint-hearted! The method I will reveal has been made illegal in parts of Europe and the UK government itself banned the practice for three months during the credit crunch. At the time of writing, it is legal here in the UK.
Take a look at the following chart of the FTSE 100 on which I have drawn two lines on this chart. One in green. One in purple:
The green line is a support line. The purple line is a resistance line. Basically, the green line is ‘supporting’ the price because the price cannot go through it. The purple line acts like a resistance to the price action because the price cannot seem to go above it and so the line becomes a resistance line.
Technical traders like myself will buy a market when it breaks through a resistance line and short sella company when it breaks though a resistance line.
The longer the support or resistance line, the more violent the price action is when the price breaks through it 🙂
The only downside to trading this way is the incredible amount of patience required to wait for set ups like the one in the chart; the pattern above took between 5 – 6 months to form. When they do come around though, the results can be quite nice!