How To Find Support And Resistance In Day Trading
Finding support and resistance levels when day trading can be a beneficial form of technical analysis. These key price levels can help any trader gain a better understanding of market sentiment, the behavior of the market participants, and the price action of a financial asset.
Many retail investor accounts rely on support and resistance lines to inform them of consolidation periods, price breakouts, and implement support and resistance trading strategies.
You may wonder what support and resistance levels are, how to find them when trading, and a way to use them. Let’s dive into this subject some so you have a better understanding!
What Are Support and Resistance Levels
Support and resistance levels are respected pricing values based on historical price data.
For support and resistance levels to form, past price action must reject up or down multiple times at a key price level. Multiple price hits not going above or below a certain level and multiple retests are the backbone of support and resistance.
Identify Support
Support levels are where the price has failed to fall below after multiple attempts.
When the price approaches significant support, buyer interest is engaged and the price of the asset increases.
Identify Resistance
Resistance levels are where the price has failed to rise above after multiple attempts.
When the price approaches resistance, buyer participation loses strength, and the price of the asset then declines.
How to Find Support and Resistance Levels
Support and resistance levels are created by price action hitting the same price levels and rejecting them more than twice. This means they are retested time and time again and successfully repel the price at a key level of support or level of resistance.
Most traders can find support and resistance lines easily on their preferred trading platform by identifying previous zones that have endured multiple price tests with notable rejections.
It is ideal to look for areas of consolidated price ranges, price moves that retest supply and demand zones, and/or candlestick patterns that form on a price chart.
During a period of consolidation, trading volume will be lower. You will see a tighter range in value and price action bouncing between values, creating support and resistance areas. These periods normally happen after larger price swings have occurred, which is why you may recognize them in chart patterns such as a triangle or flag pattern.
The result? Support and resistance levels, creating visually present trendlines. These trendlines can appear as a flat, horizontal line, or as channels and sometimes sloped.
When drawing support and resistance levels, look for how many touches the price levels have endured, and the length of time the price range has been respected. The longer the time frame, the more significant a support level or resistance area may be.
Take note that when trading daily, meaning you are buying and selling your positions on the same trading day, these areas may not be as prolonged. A day trader may need to adjust their profit expectations to the quicker time frame and smaller price moves.
How to Use Support and Resistance Levels
Since we know how to find support and resistance levels by looking for multiple price tests with rejection, how can we use this information to our advantage?
There are various ways you can trade support and resistance levels. Here are three common support and resistance strategies.
Please note that this is not meant to be investment advice but rather a brief insight as to how you can utilize support and resistance levels to your advantage when trading.
1) Resistance Trading Strategies
When the price reaches resistance levels, past performance predicts it will reject and go back down again. A trader may consider a short position or options put taking advantage of the downside. If a trader is already long, they may decide to sell their position once it reaches the resistance level before the price drops again.
2) Support Trading Strategies
When the price reaches a support level, past performance may predict it will bounce off and go back up again. A trader may consider a long position or options call taking advantage of the upside. If a trader is already short, they may decide to sell their position once it reaches major support before the price moves back up.
3) Breakout Strategies
The idea behind support and resistance levels is that the more they are respected, the more significant they are. Yet, at some point, the stock breaks these levels due to strong selling pressure or strong buying pressure.
Identifying support and resistance and noticing when the market breaks these defined levels can provide an opportunity to open a trade position early on in a new trend.
Breakouts tend to demonstrate market volatility. Their volume can have an impact on price action making breakouts a popular trading strategy.
For example, if a stock price breaks resistance levels, a trader may see an opportunity for a long position or options call. A trader could enter once the candle closes above resistance, or they can await a retest of that same price level (which then becomes support). Either way, their stop loss would be at the base of the entry candle to minimize financial risk and protect them from a false breakout signal.
Important to Note
Who likes losing money rapidly? Not I! This is why it is extremely important to note that using support and resistance levels when trading involves risk.
It is a great tool to take notice of and draw support and draw resistance levels out on a price chart. No matter how accurate you draw them, their information may not be reliable in every circumstance. Calling all novice traders or experienced ones…look for confirmation!
Your trading performance would benefit greatly from finding additional means of strong support before executing your trade entry. Seek confirmation of the price move by looking at the next candle, using technical analysis, or technical indicators.
For example, the next candle or confirmation candle, candlestick patterns, and moving averages can be helpful. Indicators, such as the RSI, Bollinger Bands, and the MACD, can help a day trader implement better trading opportunities.
Also, take note of the overall market trend for the asset you are trading. Sometimes the bullish or bearish direction can be a good indication of a breakout that supports the prevailing trend.
By seeking the confluence of the move, you are turning that high risk into something more manageable and possibly more profitable!
Summary: How to Find Support and Resistance in Day Trading
Finding support and resistance levels on a financial asset can help a day trader read the market participant’s beliefs and help determine the value of the stock.
Support and resistance levels are created by price action hitting the same price levels and rejecting them more than twice. This means they are retested time and time again and successfully repel the price at a key level of support or level of resistance.
There are multiple ways to trade off of support and resistance levels, however their buy and sell signals should be validated with other means of confirmation.
Practice drawing and using support and resistance levels while paper trading to develop the skills and confidence required to implement winning trades using them. Know that major support and resistance levels will remain intact until they don’t! Breakouts do occur and can be valid trading signals.
Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”