Stock Of The Day: Coinbase Illustrates Important Price Levels

The best traders know how to identify important price levels. These are called support and resistance levels. A common market dynamic is levels of support converting into resistance and levels of resistance turning into support.

As you can see on the chart, the $203 level has been both support and resistance for Coinbase Global Inc. COIN since May. This is why our team of trading experts has made it our Stock of the Day.

If a market is going down there aren't enough buy orders to absorb all the sell orders. As a result, sellers are forced to push the price lower to draw buyers into the market.

When a stock reaches a support level, the tide turns. There is more than enough demand to absorb all of the supply. Traders can sell all they want without worrying about pushing the price lower.

Sometimes, the support “breaks,” and the stock heads lower. When this happens, many who bought shares at the support regret doing so. Some vow to sell their positions but don't want to lose money.

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So, they wait for the stock to rally back up to their buying price so they can exit the position at breakeven. If there are enough of these remorseful buyers placing sell orders at the same price that had been support, it can convert what had been support into resistance.

If the resistance eventually breaks and the price moves higher, a number of the traders who sold their shares at the resistance regret doing so. Some of them decide to buy their shares back. But they will only do so if they can get them for the same price they were sold.

As a result, if the price eventually reverses and drops back to their selling price, they place buy orders. If there are enough of these buy orders, it will create support at the same price that had previously been resistance.

The best traders know that some price levels are more important than others. They also know support levels can become resistance levels, and resistance levels can become support levels.

This is what has happened with the $203 level for Coinbase. Understanding these dynamics gives traders insight into where to place buy and sell orders.

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