Support and resistance trading is the absolute foundation when trading. Trading is all about knowing support and resistance. When trading you typically want to buy low and sell high. One of the most talked about aspects of technical analysis is resistance and support.
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How Does Support and Resistance Trading Work?
Support and resistance trading is the most important aspect to becoming a successful trader. Look for previous highs and lows on a stock chart then find where current price action is and then draw your trendlines. Fundamental analysis is also key, however, knowing the levels on where to buy and sell is the critical component to making money in the stock market.
Resistance and support seems simple but when you’re starting out, it can be difficult to go get the hang of. Support is the level a stock bounces off of multiple times without breaking. It supports a price without falling below that level.
Resistance is the level a stock hits multiple times without breaking. Knowing how to find resistance and support is one of the most important things you’ll learn when you begin trading. It’s what’s going to keep you from making a bad trade.
Support and resistance trading is the most important trading tool you can learn. If you’ve ever watched any of our videos, you’ll notice that with every stock we look at, we’re always finding key areas of support and resistance and patterns.
Finding those tells us whether or not the stock would be a good candidate for the watch list. If you’re watching a stock and you noticed it keeps falling to a certain but it doesn’t go below that.
Every time it hits that price it bounces back up. That’s a support level. If it eventually falls below that level that support level becomes a new resistance level.
Resistance works the same way. If you’re expecting a stock to climb to a certain price but it fails to reach it because it falls every time it gets near, that’s a resistance level.
If it breaks that resistance level and holds, the resistance level becomes to new support level. Knowing how to find these levels will be the tool to making to most profit and there are many ways to find resistance and support. Price action is going to be your best friend with this style of trading.
Support and resistance trading using trend lines and channels shows you the direction a stock is moving. This is especially helpful if you’re going to swing trade. Sometimes a stock will have 1 or 2 good days and you’re like man I need to get in this stock.
While it looks good it may be in a downtrend or a channel that’s going down. You don’t want to buy when it’s trading at the bottom of the channel because there’s a good chance it falls out of that and goes lower. Use this tool when you swing trade. It’ll keep you from taking a bad position.
Using candlesticks in support and resistance trading gives you many levels of support and resistance. You’re looking at the body of the candles as well as the wicks.
Candlesticks show you if a stock is bullish or bearish in that moment. Candlesticks on the daily chart are a great way to show you how to find resistance and support levels.
Moving average lines are another great tool to use when support and resistance trading. Using the 9 and 20 EMAs with VWAP is a great support and resistance trading system especially when day trading. Those moving average lines are constantly changing to reflect price.
This lets you as a trader identify resistance and support pretty quickly. Stocks use moving averages as support when they are moving up and as resistance when the trend is bearish.
Round numbers are another way to find resistance and support. This is also known as psychological support and resistance levels. Stocks tend to have difficulty moving when a stock is at whole or half dollar amounts.
That is why you should never buy at those levels if the stock is already running. Wait until it breaks the 50 cent or dollar mark and hold before buying. Most target prices for a stock are at the whole and half dollar levels which is why there’s usually a strong resistance at those levels.
Learning support and resistance trading is the greatest tool you’ll have to making a profit. Using all the different ways to find support and resistance will keep you from buying at a bad level. The mantra is buy the dip and sell the rip.
Those highs and lows are the resistance and support of the stock. Buying too close to resistance is a recipe for small profits or even loss. Learn support and resistance! It’s your greatest tool for trading stocks, futures, or crypto!
Frequently Asked Questions
- Here's how you trade support and resistance levels:
- Bulls aka long traders try to push price up
- Bears aka shorts try to push price down
- Long traders buy low at support and sell high near resistance
- Short traders go short near resistance levels and cover at support levels
- Here's how you determine strong support and resistance levels:
- Need to understand candlestick patterns
- Know how to draw trend lines and horizontal support and resistance levels
- Look for as many peaks and valleys on a chart as possible
- Look for reversal patterns and strong volume bars