Support and Resistance Levels Trading Strategies

We had heard about Support and Resistance many times while we talk about day trading in stock market. If you are also in search of definition of support and resistance,support and resistance strategies, support and resistance indicators, and how to identify support and resistance levels/ranges. then I will discuss about this topic today. As a trader I think we all assume the standard rectangle with highs and lows makes up a trading range; however, there is so much more to the matter.  There are a few additional resources I would like to point out before you proceed with the article; (1) Trading Simulator (you will need to practice trading support and resistance levels with real world data) and (2) additional support and resistance articles to get a broader understanding of market influences (Fibonnaci Extensions, Trend Lines, Gap Pullback Strategy).

Defining Support and Resistance

Defining the concept of support and resistance is fairly simple. When discussing it in the context of the stock market, it defines the levels at which buyers and sellers step into a market or where the law of supply and demand come into play. Imbalances in supply and demand create support and resistance levels. For example, when an overwhelmingly high number of buyers (demand) step into the market, an indication of support is being put into the market. Conversely, a large number of sellers (supply) indicates that there is overhead resistance preventing the stock from moving higher.
The price levels which create support and resistance in a stock only tell half of the story. We mentioned a key phrase above; “overwhelmingly high”. Volume, is the second half of the equation and shows us the strength behind the buying or selling at support and resistance levels. The stronger the buying or selling is at support and resistance levels, the more important of a signal is being given.

Support and resistance can come in many forms:



Blow off tops or panic selloffs can put tops and bottoms into markets and mark important support or resistance levels for a stock.
An increasingly popular technique for determining support and resistance can be derived through the use of Fibonacci levels. These levels are viewed by some as imaginary levels but have now developed a strong significance due to their widespread use. It is almost a self-fulfilling prophecy which causes prices to stop and reverse at these levels.
Speaking of imaginary levels; many traders, especially day traders, use whole numbers to define support and resistance levels. Decade (Rs10, Rs20, etc) and century numbers (Rs100, Rs200, etc) are looked at very closely by many traders.
Many traders also use trend lines and other technical indicators such as the RSI, slow stochastic, moving averages, and CCI to derive logical levels of support and resistance in a stock.
Gaps often act as magnets for prices; for example, if a stock opens down 3 points in the morning, that price gap will most likely be filled at some later point. The close of the bar prior to the gap is considered to be support on gap ups and resistance on gap downs.

Support and Resistance Indicators

Indicators are a great addition when looking at support and resistance levels.  This is because the indicators will act as another form of validation that the security is approaching a support or resistance level.  Since support and resistance levels act in a cyclical fashion, meaning the price will bounce off of the high and lows of the range; oscillators are the best fit.  Oscillators like support and resistance levels will bounce from one extreme to the next.  Here is a list of indicators that are great with support and resistance levels: RSI and Slow Stochastics.

Not an Exact Science

Defining support and resistance levels is not an exact science. You will rarely get support levels retested at exact prices. Keep an open mind; most of the time, you will see zones of support and resistance.

Trading Ranges

A few key points we want to mention regarding trading ranges. If a stock moves out of its support and resistance boundaries with heavy volume, you are possibly looking at a shift in the character of the stock. For example, if a stock moves up through the top of its range with heavy volume, it is indicating that the buyers were able to take hold of the stock and overpower the sellers at that level. This is bullish and the former resistance level should now be considered as support on a pullback. You can almost look at it as if the bulls claimed victory at that price level.
A breakout of a trading range in which the preceding trend was sharply down is more reliable than a breakout of a trading range that comes after a rally. These are considered secondary rallies and are more prone to failure.

Conclusion

In conclusion, you must study how a stock behaves at key support and resistance levels and take note of climactic increases in volume as it typically is associated with panic or extreme levels of greed. This is a good time to look for take the opposite side of the primary trend. Remember, climactic volume eats up a large amount of buyers and sellers and tends to produce sharp snap backs in either direction as buyers have put in major support and sellers will have put in major resistance going forward.