Support and Resistance, what is it? Support is the price at which a declining stock is expected to stop its decline. Resistance is alternately the price at which a stock that is in a rally can be expected to find trouble and end its move up. The rationale for support and resistance is found in human nature. When a stock price moves, three different groups of market participants are affected. There are the traders on the correct side of the market and these traders are happy because they begin to rack up profits and may even close out there position for a profit. Then there are the traders on the wrong side of the market and these traders begin to squirm and feel uncomfortable as they begin to feel their losses mount. Finally there are the traders who had intended to get on the right side of the market but who had never gotten around to acting on their beliefs and are kicking themselves.

So what happens when the stocks price returns to the original levels? Well the trader on the right side of the market the first time considers buying the stock at these levels again because they were profitable before. The trader on the wrong side of the market breathes a sigh of relief and closes out their losing position for a small loss. Then the trader that missed the boat the first time jumps in with both feet this time because they got the opportunity they missed back and they don't intend on missing it again.

Trending markets create and generate their own support and resistance through moving average ribbons. Moving averages provide significant boundaries define trends and offer natural pullback levels. Market participants often use these moving averages especially the 10 day, 20 day, 50 day, 150 day, and 200 day moving averages. Of these the 20 day, 50 day and 200 day moving averages are the most important and should be used in all time frames especially the daily chart. Moving averages are very useful in many respects however in this discussion I will just stress the point that they should at least be used by a trader as possible support/ resistance levels. If a stock price is climbing toward the 200 day moving average on the daily chart it will find resistance at this price level as an example.

Fibonacci is a somewhat mysterious however often very accurate support and resistance tool. Fibonacci uses crowd behavior in its calculations, often a rally brings a common amount of participation and when it ends and starts to fall back traders try to predict how far the price of the stock may fall before the trend of the price resumes. Unknown to most these traders often subconsciously calculate the fibonacci retracements in there inner mind as good areas with which the stock price will find support and renew its original trend. Fibonacci levels often used are the 23.8%, 38.2%, 50%, 61.8%, 78.2%, 100% and should be calculated using the high and low number values of the previous trend or used simultaneously over more than one time frame and over more than one trend. Much more can be spoken on the Fibonacci levels however I will go into that at a later date.

Whole numbers are also a very important tool in identifying support and resistance levels. Often stocks will see whole numbers such as $5, $10, $15, $20, $25, $30, $35, $40, $45, $50, $60, $70, $80, $90, $100 as important psychological barriers. Many times this can even be used on a smaller scale when trading intraday.

Breakouts happen when a resistance is broken by the stock price overcoming gravity and entering a new up trend on an increasing volume burst. This volume burst is caused by the momentum crowd jumping in and propagating a rally. Many times the value players create large bases or tightening price coils that build towards breakout points and then the growth and momentum traders jump in and fuel the critical forces needed for a strong rally. However the volume must be there for the rally to continue otherwise the stock may only break into a new trading range or worse yet may fall back through as a failed rally. Note that breakdowns are just opposite breakouts.

First of all a swing trader needs to identify a strategy with which they are attempting to trade. Are they attempting to trade a breakout, breakdown or a channel trade? How long are they willing to hold a stock? An average swing trader holds a stock for somewhere between 2 days to 1 week anything more than that is either a position trader or an investor. What kind of stop loss will you use 2%, 3% or 5% and when will you trail your stops? Swing traders should attempt to identify the stocks that they may consider trading prior to market open of the current trading day by using scanning software and looking for particular set ups that interest them. A swing trader should prepare for the day by writing down the high, low and close of the previous trading day for the stock. These are important support and resistance levels to use. The swing trader should calculate the fibonacci levels for potential support/ resistance on different time frames such as the daily and 60 minute charts for all support and resistances. The daily and 60 minute charts offer potential support and resistance areas at certain chart price levels and also important moving averages as well. These are the "bigger picture" support and resistance levels and are much more important than the regular intraday levels.

Daytraders should attempt to identify the stocks that they may consider trading prior to market open of the current trading day. A daytraders should prepare for the day by writing down the high, low and close of the previous trading day for the stock. These are important support and resistance levels to use. The trader should also use these to calculate the fibonacci levels for potential support/ resistance. These fibonacci levels should be adjusted actively throughout the day to eventually encompass the current trading days high, low and open, which also become important support and resistance levels. The next thing you should consider doing is looking at different time frames such as the daily and 60 minute charts for other support and resistances. These potential support and resistance areas are chart price levels and also important moving averages that may be encountered intraday. Many times these "bigger picture" support and resistance levels are much more important than the regular intraday levels.

Running a website can be difficult, time consuming, and costly. Please consider making honorary payments so we can continue to run this trading website without having to charge any set monthy fees. If you had a profitable day, week, or month from our services consider a small payment of just $15, $25, $50, $75. This is a small price to pay for decent trading services!