Support and Resistance Technical Analysis and Day Trading

By: Manny Backus
Let’s start with a definition of support and resistance. Support is an area of accumulation where the price of the stock is cheap enough so that people buy more (accumulate more) of the stock. Resistance is an area of distribution where the stock is at a price that traders deem to be too expensive or when they want to protect the profits they have earned, so they are encouraged to distribute or sell their holdings.

Traders who are able to successfully determine areas of support and resistance have the ability to potentially profit from market movements. Fear and greed are the two major driving forces for market movement. Those who are day trading online know that while there may be many reasons for purchasing and holding a stock, the overall market movement is based on human instinct. With that in mind, styles of trading such as day trading, swing trading and momentum trading all utilize support and resistance analysis for potential market gain.

Here are some day trading tips to help you identify areas of support and resistance.

1) Identify a strong area for support or resistance.

Traders who are day trading stocks should look for the number of times that a support or resistance line has been tested. For example, if a stock has been at $40 eight times in the past six weeks and has also been at $45 three times during the same time frame, the stronger line is at the $40 price.

2) Identify horizontal and diagonal lines of support and resistance.

Traders may easily see horizontal lines of support and resistance, but they should also know that identifying a diagonal trend helps to forecast upward or downward movements of the stock. For example, the price might fluctuate daily, but if over an eight week period the price moves from $40 to $41 to $43 to $44 to $45 and so forth, traders are able to see a very apparent upward trend in stock price.

3) Identify when a support or resistance line has been broken.

If the stock prices falls below or climbs above the support or resistance line, the trend of the stock has changed. The stock might become bear, bull or neutral and day traders may need to rely on other indicators that are part of their day trading strategy to determine what action to take concerning the stock. A quick tip to help you identify if a trend change has occurred is by looking at the amount of the price difference between the support or resistance price and closing price. If the closing has at least a three to five percent difference from the support or resistance price, then most likely the line has been broken.

Support and resistance are important aspects of many day trading strategies. As you get more familiar with identifying these lines, you will strengthen your trading system and have greater potential to capitalize on market movement profits.

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