If you are an aspiring day trader, You need to learn how to identify levels of support and resistance.
For both shorts and longs, support and resistance are the foundations of day trading. Knowing how to determine them is fundamental to the trading patterns I use.
What is special about these levels? Traders can learn to use support and resistance levels to value stocks based on past performance.
If you cannot identify an area of support, how do you decide on a risk level? And if you’re not looking for resistance, then how do you know when to sell a stock that is going up? It is important to learn these things.
I say this all the time … Education should be a top priority for every trader. Studying hard and taking it one day at a time is the way to become self-sufficient in these crazy markets.
What are support and resistance?
This trading concept has been around for ages – long before I started. Support and resistance are among the most important indicators to include in any trading plan … and you MUST learn to identify them.
If you are not familiar with the terms, here is a brief introduction …
Think of support and resistance levels as areas where a stock needs time to decide on its next move.
A support level is a price that a stock tends to stay above. Suppose a stock goes down. It finds new buyers as soon as the selling pressure subsides. If buyers gain the upper hand, the bottom of the pullback is a support level.
A resistance level is basically the opposite. It’s a historically high level for a stock … a price that the stock has struggled to break in the past.
Why is that important? Regardless of the trading style, traders can use support and resistance to determine appropriate levels of risk. Some penny stick patterns, like breakouts, revolve around looking for a stock to break support or resistance.
If You Are New To Penny Stocks Trading, Check out my FREE Penny Stock Guide!
This is how you determine the support
It can be helpful to identify support levels. But it’s not exactly easy.
You can’t just buy any jump and hope the stock finds support there. The most reliable support levels are the unique ones. Be on the lookout for more volume. More buyers can indicate more strength.
The S&P 500, also known as the SPY, gave us a great example in March 2020. After the overall market posted a sharp decline, the index rebounded to around $ 220. Note the sharp rise in volume during this time.
If the stock market falls into this range again in the future, $ 220 could potentially serve as support. If it breaks the support level, traders will likely see it as weakness and sell, which will bring the price down even further.
It is important to track support levels across multiple time frames. A stock’s history can show you some really valuable information.
You can also look for an area where a prize has been defended multiple times. This is what traders call a double or triple bottom. If a stock fails to break below price multiple times, this may indicate that it has reached a strong level of support.
For example, take a look at Tesoro Enterprises Inc. (OTCPK: TSNP).
That stock was on fire in early 2021, rising from under a cent to nearly $ 2 in just a few months.
In the three days February 9-11, TSNP hit a three-way low at $ 1.25. Could that be in preparation for the next stage?
Buy at support level
Traders use levels of support regardless of whether they are long or short. If they go long they try to buy in near a support level. Remember – whenever a stock loses support, always reduce losses quickly.
Traders buy in at the support level because they expect the stock to be strong enough to rebound. It’s part of trading psychology.
Even if it is clear that a stock has found support, less experienced traders may pursue it higher. This action can lead to large price jumps.
One of my preferred trading patterns is the Panic Dip Buy – it involves buying into a support level while it is forming. I’m trying to get as close to the bottom as possible … I’m not chasing the stock if it’s already bouncing heavily.
Here is a table from Enzolytics Inc. (OTCPK: ENZC).
You can see two key levels of support where the price movement turned from sell to buy. The equity panic fell to just under 7 cents and then rebounded to just over 8 cents.
Then it broke the previous support before falling off again. It went down to 5.5 cents and then bounced back to almost 8 cents. Note the increased volume in both areas. I’ve seen this pattern over and over again. And as we can see here, sometimes even twice in one day.
Any trading pattern MUST be high risk. Never enter a trade unprepared. Plan each part of the trade in advance and stick with it no matter what.
How to Identify Resistance
In a way, resistance is the opposite of support. But you need to know the pros and cons. Here is an example …
Suppose a stock that has been running for several days finally reaches a parabolic stage with massive volume. Traders chase it at these high prices hoping for an easy trade. But parabolic motion is not a good long opportunity – it will inevitably be overstretched.
The stock is pulling back and the traders who chased it are holding on at high prices. Often times, these traders hold on until they break even or suffer a smaller loss.
The price range the pursuers are stuck in could serve as a future level of resistance. This is an issue in the markets. Take notes and learn to be on the right side of the action.
Sell close resistance
In these wild times, it’s easy to forget what a regular market feels like. We see multi-day runners break through the resistance levels.
But unless the market is completely on fire, the goal for many day traders is to near sell resistance. Because of the chasers, these levels can prevent a stock from going higher.
Think of this strategy. We could stop seeing such crazy volatility and resistance levels could become a major hurdle for stocks again. Every trader has to take this into account.
It takes discipline to navigate a changing market. Get my “Volatility Survival Guide” now for free and start preparing!
Why I Buy Breakouts
Another trading pattern I have in my arsenal is a breakout. A stock breaks out when it crosses a resistance level. Once that happens there is usually much less pressure to sell. So the stock has room for profit.
Here is a recent example of a major breakout over massive resistance at Sundial Growers Inc. (NASDAQ: SNDL) …
On the morning of January 28, SNDL traded over 300 million shares in less than 300 hours. It was at $ 1.35 and then pulled back over 50% to 66 cents.
At this point, the pursuers appeared to be trapped. Lots of people got stuck holding the stock near those morning highs. During the next seven days, SNDL tested the $ 1.35 area multiple times and failed to break through. Too much has been sold.
It finally broke resistance levels on the morning of February 9th. This breakout caused the stock to hit nearly $ 5 on February 11th. This is a great example of the potential behind this pattern.
You need experience and commitment to learn these patterns. When you’re ready, check out mine 30 days boot camp! Go from basics to patterns and beyond in just 30 days. Get it today!
Apply to My Trading Challenge
If you are a dedicated student of the markets check out my Trading Challenge. I started the challenge to teach traders how to trade penny stocks. Including recognizing patterns based on support and resistance.
When you think you have what it takes, apply to take the challenge. But I don’t accept everyone – only the toughest workers make the cut.
If you are accepted, you will become part of our challenge chat room. It’s an opportunity to network with other hardworking traders. You can learn so much!
You also have instant access to tons of study material – video courses, webinars, and more. Also, I post all of my trades, including my losses, on Profit.ly so you can learn and learn from them.
I have been in retail for 20 years and have been teaching for over 10 years. I now had several six- and seven-digit students who became self-sufficient using just a handful of trading patterns. *
When you have the surrender, the challenge can help you develop an eye for patterns. Apply today and start your journey!
(* These results are not typical. Individual results will vary. Most traders lose money. These traders and I benefit from years of hard work, experience, and dedication. Trading is inherently risky. Always do your due diligence and risk You never lose more than you can afford.)
The bottom line on support and resistance
Successful traders know how to identify levels of support and resistance. Those who do not respect the basics are not only using an incomplete trading plan, but also showing their arrogance.
Some of these concepts have been around longer than we have. You have proven yourself. So learn to ride the wave instead of fighting it.
And remember, markets are always changing. Right now the abundance of runners is great! It can almost make support and resistance seem irrelevant. But that couldn’t be further from the truth.
If the market is slowing down, don’t be on the hunt. Study the basics of trading like support and resistance as best you can.
Learn aggressively and act wisely. You have what it takes to be a self-sufficient trader.
How do you use support and resistance in your trade? Let me know in the comments!