Daniel Pessin

Daniel Pessin on Support and Resistance and why it’s important

Understanding support and resistance lines is very important when trading stocks. It’s probably the most important part of technical analysis as a day trader. If you can master support and resistance lines you will have a much better chance of being a successful day trader. In this blog post, I’m going to go over some support and resistance examples and how it can make you a better trader and help you have more winning trades.

 

Why is it important to understand support and resistance lines?

 

By understanding support and resistance lines, you will give yourself the best possibility to make the best possible entry into a trade. This is very important because it will give you the best chance to have a winning trade. For example, you should only buy at support and sell at resistance. You don’t want to buy at resistance, in fact, that’s the worst area to buy, because there’s a good chance that the stock will hit resistance and reverse and go back down. This will result in a loss. There is a possibility the stock will breakthrough resistance and breakout. In this situation, you would win the trade. However, there chances of the stock breaking out are very low. Usually it will hit resistance 2 or 3 times before breaking out. 

GROV

GROV Chart Example

 

Take a look at this chart. Notice the support lines in orange. The support line would be the orange line at the bottom. The resistance line would be the orange line above it. Notice how the candle stick are moving in between the lines. if you were to buy at support and sell at resistance you would make a profit. On the flip side see, if you were to buy at resistance and sell it support you would take a loss. As a Trader you want to try your best to buy and enter a stock at support. This will give you the best chance to have a winning trade. You can short a stock at resistance and then cover at support. This is another way where you can trade the stock and still be profitable.

Once you identify as a support line that price level will be your best potential entry because at that price level you know that it will most likely bounce and return to the resistance level. In some situations if the price continues to go down through the support line then there’s a good chance the price will continue to go down to the next support line below it. In this case the original support line will now become new resistance. On the flip side, if the price breaks through a resistance line then that resistance line will become new support. Old resistance becomes new support.

Here is a great youtube video with a simple examples if you want to check it out.

https://www.youtube.com/watch?v=uj4ohg280eE

Simply put, an area of support is where the price of a stock will most likely stop falling. Most likely there will be buyers at the support level to push the stock back up to the resistance level. Understanding support and resistance lines is a good starting point to becoming a profitable trader.  To become a successful trader you need to have good entries and exits. Understanding support and resistance lines will help give you the best chances to have the best entries and exits.

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