Trading stock is risky business, so whenever traders can minimize uncertainty and maximize chances of making profits, they take the chance. No wonder there are long lists of tools traders have developed over the years to do just that. Although no one trader would recommend using these tools on their own, it warrants a grounded understanding of each of these tools in order to get the best outcomes.

Support and resistance levels are one of the most popular attributes of technical analyses for traders. In a nutshell, support levels are the floors in a trade trend chart where prices have a history of not falling below. On the other end are resistance levels which are akin to the ceilings above which prices have a history of rising above.

Intuitive and simple, right? Well, yes and no.

Trading stock is naturally complex, and so are the tools. In fact, the more robust and bonafide an analysis technique is, the better it is for traders because it takes into account an array of factors before giving insights.

So, while knowing the area within which stock prices fluctuate is useful in making informed selling and buying decisions, it requires an in-depth understanding of trends in order to make profitable decisions.
Broadly speaking, insights from support and resistance levels are useful for buying and selling decisions. Intuitively, selling at the highest level (resistance level) is the most profitable decision and buying at the lowest level (support level) is the savviest buying decision.

However, accurately interpreting and predicting when to buy and when to sell requires a trader to know major and minor support and resistance levels as well as the general movement or trend of asset prices. These are useful in predicting the direction of trends and fluctuation of levels.

Minor and Major Levels

When looking at a chart, you can easily discern major trends and minor trends. Major trends typically span a number of years while minor trends span short periods of time and exist within major trends. These also tell us where we can expect to see minor support and resistance levels.

Minor support and resistance are more volatile and we can confidently predict that they will be broken within a predictable time frame. For instance, a downward trend in prices within a larger upward trend can easily allow the minor support level to bounce back up and drop within shorter time frames.

On the other hand, major support and resistance levels are persistent over time and we don’t expect prices to fall or rise above or below for longer periods of time. Given this difference, traders often pay more attention to minor support and resistance levels to make selling and buying decisions.

Trend lines

Charts are complex and perhaps even more complex are the dynamics which the prices go through. Fluctuations are normal but the smart trader probably wants to predict and anticipate them as closely as possible. This is where trend lines come in to complement support and resistance levels.

A trend line is easily discernible in a chart and hopefully, yours is trending upwards. Trend lines affect the support and resistance level. The larger a positive slope (upwards) of your trend line is, the higher your support levels will be which means it will cost you more to buy into that stock. In the same trend line, however, is a higher resistance level which means you can sell your stock for more than you would be able to sell in a negative trend line.

You can also guess that it may not be smart to trade in a downward trend and that it’s better to wait for the trend to pick back up so that you can get better value for your money. Another source to learn Day Trading in stocks is by joining Day Trading Academy (DTA) created by Marcello Arrambide. You can learn a lot of day trading technique and principal from Marcello and his team. Most of the students joined the academy are making a daily profit these days.

Trading using Support and Resistance

The end goal of using support and resistance analysis is to make more money by buying the stock when they are cheapest and sell when they are the most expensive. In this case, your buying and selling decisions are guided by these levels. However, there are a couple of considerations in addition to knowing where the levels are and the general direction of the trend.

Generally, selling or buying stock close to either the support or resistance level can pay off, but, unfortunately, there is no guarantee that your prediction will hold as the trends change.

When considering buying around the support area, it will be smart to observe the trend and purchase when there is a sign of an upward trend. Wait to see whether there is considerable crowding around this area (indicating that this could be the lowest prices will go for a period of time). When the price trend makes a small move upwards, consider making a purchase at that point. This is smart because you would have observed the price is picking up and that you will have a better chance of making a profit when selling your stock later.

The same logic applies when considering selling your stock. At the resistance level, take time to observe that there is a fair amount of consolidation over a period of time at that level before selling. The best time to sell would be when you observe a downward trend (indicating that you are safe from selling when the price could have potentially increased).

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