DTT Buzz
Exclusive Market Analysis, Alerts and Commentary from the DaytradeTeam trading staff
Thursday, April 24, 2008
Support and Resistance Levels
You have probably heard references to support and resistance levels for stocks on almost a daily basis. We would like to give you a quick idea of what we mean by these terms and an explanation of how you can use them in your own trading.
Support Level: A price level where the stock has seen increased buying interest in the past, resulting in an upwards move. This is a level that you expect the stock to move up from in the future.
Resistance Level: Just the opposite. A price level where the stock has seen increased selling interest in the past, resulting in a downwards move. This is a level that you expect the stock to move down from in the future.
Support/resistance levels can come in all varieties---they can be "intraday support levels", a price level that the stock has moved up from within a single trading day, or more meaningful levels such as a resistance level that the stock has not been able to get above for months.
Summary:
Look at the past trading history of the stock for price levels where the direction has reversed in the past two or more times. These are often support or resistance levels. Buy stocks when they are fairly close to support levels, sell (or short sell) them when they are fairly close to resistance levels. Use a stop to exit the position if the support or resistance level failsWhen support levels are broken, they will often become new resistance levels for future trading of the stock. When resistance levels are broken, they will often become now support levels for the stock.
Caution: DaytradeTeam would not advise trading based on support or resistance levels alone. It is just part of the overall picture. If a stock has a trend that is going up and is near a resistance level, it may not be a good sell (the reason the trend is up is that the stock is breaking through old resistance levels consistently!) We like to use support/resistance as a trade verification technique for services such as our Day Trading System. If our indicators are saying that XYZ is going to go up AND XYZ is near a support level, then we will be much more likely to make the trade or trade more money than if XYZ is near a resistance level. Support/Resistance levels are also useful DURING the trade, because they can help you determine where to place stops (on the other side of the level), what your target should be (inside of the level), and where to expect a potential breakout (on the other side of the level).
Support Level: A price level where the stock has seen increased buying interest in the past, resulting in an upwards move. This is a level that you expect the stock to move up from in the future.
Resistance Level: Just the opposite. A price level where the stock has seen increased selling interest in the past, resulting in a downwards move. This is a level that you expect the stock to move down from in the future.
Support/resistance levels can come in all varieties---they can be "intraday support levels", a price level that the stock has moved up from within a single trading day, or more meaningful levels such as a resistance level that the stock has not been able to get above for months.
Summary:
Look at the past trading history of the stock for price levels where the direction has reversed in the past two or more times. These are often support or resistance levels. Buy stocks when they are fairly close to support levels, sell (or short sell) them when they are fairly close to resistance levels. Use a stop to exit the position if the support or resistance level fails
Caution: DaytradeTeam would not advise trading based on support or resistance levels alone. It is just part of the overall picture. If a stock has a trend that is going up and is near a resistance level, it may not be a good sell (the reason the trend is up is that the stock is breaking through old resistance levels consistently!) We like to use support/resistance as a trade verification technique for services such as our Day Trading System. If our indicators are saying that XYZ is going to go up AND XYZ is near a support level, then we will be much more likely to make the trade or trade more money than if XYZ is near a resistance level. Support/Resistance levels are also useful DURING the trade, because they can help you determine where to place stops (on the other side of the level), what your target should be (inside of the level), and where to expect a potential breakout (on the other side of the level).
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