Home » BLOG » draw support and resistance levels » Support and Resistance Trading Explained
Posted on August 16, 2018 by Bullish Bears – Charting, Technical Analysis
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. Buy low and sell high.
How Does Support and Resistance Trading Work?
* How does support and resistance trading work? The stock market is a battle between the bulls and the bears. Bulls push price up and bears push price down. This battle creates candlestick patterns which form important support and resistance levels.
Support and resistance trading is the absolute foundation when trading. Trading is all about knowing support and resistance. Buy low and sell high. The video below gives an overview on how to determine proper resistance and support levels on stock charts.
Resistance and support trading is fundamental to success. 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.
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.
Basics of Support and Resistance Trading
Support and resistance trading is the most important trading tool you can learn. If you’ve ever watched any of our watch list videos, you’ll notice that with every stock we look at, we’re always finding key areas of support and resistance and stock 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.
Trend Lines & Support and Resistance 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.
How Do You Trade Support and Resistance Levels?
1. Here’s how you trade support and resistance levels:
2. Bulls aka long traders try to push price up.
3. Bears aka shorts try to push price down.
4. Long traders buy low at support and sell high near resistance.
5. Short traders go short near resistance levels and cover at support levels.
Here is another AAPL chart. You’ll notice the multiple lines drawn. Those are levels of resistance and support drawn based off the body and wicks of the candlesticks. Those lines show you the different levels that price would have to break to rise. Watch our video on how to draw resistance and support lines to get started on drawing your own.
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 (check out ourswing trading strategies page).
Moving average lines are another great tool to use when support and resistance trading. Using the 9 and 20 EMAs and VWAP are 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’re moving up and as resistance when the trend is bearish (try our stock picks service free).
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’s 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.
Looking for more stock market training? Take our free stock trading courses to help you get started.
How Do You Determine Strong Support and Resistance Levels?
1. Here’s how you determine strong support and resistance levels:
2. Need to understand candlestick patterns.
3. Know how to draw trend lines and horizontal support and resistance levels.
4. Look for as many peaks and valleys on a chart as possible.
5. Look for reversal patterns and strong volume bars.
Greatest Tool Is Support and Resistance Trading
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!