Sunday, September 20, 2015

My 2 Ways of Finding Support and Resistance

Support and resistance are common terms for area's on the chart where the price of a stock has a difficult time breaking through.  Support levels tend to stop a price from falling below a specific point and resistance levels act like a ceiling that a price can't break above.  Knowing where these levels are make it much easier to decide when to enter and exit trades.  So the question becomes; how do we find these levels?  Well there are several different ways to identify these levels but in this blog I will only discuss the ones I use and how I identify these levels.  It seems to me that this is an art form using a little creativity merged with exact science.  But, it has proven to be very successful for me and it has saved me from taking many marginal and bad trades.

Psychological Levels

Often called "psych" levels, psychological levels occur when price ends in 0's. It's human nature to gravitate towards round numbers when discussing any topic that involves numbers. The most common psych levels are whole and ½ dollar marks with the most powerful being the whole dollar mark.   This level is used mostly during intraday day trading.  Here is an example.  In this chart on FIT  you can clearly see their effect on price action around the whole and 1/2 dollar marks at 42, 41.50, and 41.  The daily level is identified by the green line and the yellow lines designate the intraday whole and 1/2 dollar marks that acted as support or resistance.

I simply identify these levels on the chart as they act as support or resistance so that I can be aware of them later in the day.

Swing Highs & Lows

Another great way to find daily support and resistance levels is to mark levels in the past where price had a difficult time breaking through on the daily chart. As price moves up and down, each level that price has bounced off of could be a level in the future that price bounces off of again. This is a manually intensive method and takes time to draw on the stocks that we are looking to trade, but it pays off as it helps us with establishing a successful trading plan. These levels can help us with potential entry and exit points.  To put it simply, I am only marking the tops of the peaks and the lows of the valleys 

As you can see on the daily chart on NFLX. I have identified areas of support and resistance levels where the stock price bounced up or reversed.  I also take it a step farther and identify levels of consolidation.  Not all levels I have drawn will be in play in a particular day but I usually leave the daily levels on my chart for future reference.

Now here is the intraday chart on a day that I traded NFLX.  You can see where I used the level of resistance at $101.50 which was a level from the daily as well as a half dollar mark intraday to establish an entry point to take the trade.  When an area on the daily and an area in the intraday chart line up it makes for a potentially strong area of support or resistance.  The next level on the daily was at the whole dollar $95 mark which I set as my profit target.  As you can see it had a little hiccup coming down at the $96 mark but it didn't hold initially.  Then you can see when it bounced off of the $95 area it consolidated for a while around the $96 mark which acted as support before it failed and made the move down to the 93.50's (1/2 dollar mark).  Later you see $96 held as resistance before it came back and settled around the $95 mark.  This is a perfect example of why the whole and 1/2 dollar marks intraday are significant and cannot be discounted.

As I mentioned before there are several approaches to identifying these levels but I am from the school of "KISS" (Keep it Simple Stupid).  As long as it is effective I will use it and so far it has improved my trading tremendously.  I am not perfect and it is not an exact science so it takes patience and practice. Trading requires lifelong education and even the seasoned professions have to study the markets and adapt their strategies religiously so you will find me studying and practicing every night and some on the weekends.  I have set study times to make sure I put my time in.  I hope this helps those who asked me about how I go about finding these levels.  A video will be coming soon.