What Does Support and Resistance Mean in Stock Trading?

Support and resistance are specific price levels which either support prices on declines in down trends or which resist prices on rallies in up trends.

In an up trend, short term and day traders will attempt to buy at support or at levels of support. In a down trend, day traders will attempt to sell at levels of resistance.

If support and resistance levels cannot be determined, then you cannot define concise levels in which to establish entry or exit positions in your specific trade. It is very important for forex traders to develop strategies and methods for determining support and resistance levels. These levels can be determined with the use of various trading tools like candlestick charts, Fibonacci grids and Gann angles.

Day traders have a definite advantage when it comes to the use of support and resistance levels, in as much that the day trader’s trades normally end when the trading day is over and if a bad trade or decision was made based on support or resistance levels it will not be repeated in the next trading day.

Determining support and resistance levels are somewhat different for the day trader than the position trader. This is because support and resistance levels for the day trader must be closer to the current market price that they are for the long term or position trader. Markets can only drop so far in one day, and as such the determination of support and resistance levels by the day trader must be realistic in terms of what can be expected – however this does mean that day traders must be willing to use technical support and resistance levels to establish their positions.

The following rules may appear very simple, but they are very effective at isolating support and resistance levels and can be applied in any market:

1. Follow a 3-day simple moving average of the lows, and a 3-day moving average of the highs.

2. Take the 3-day moving average of the lows to define your support level, and the 3-day moving average of the highs to define your resistance level.

3. Draw a line at the support of the lows, if the trade has made a 3-day high in say the last 3 days (you can use four or five days, depending on your trading method) This means that you will only draw in the 3-day moving average of the highs if the stock has made a 3-day low in the last three days – this means that you only want to sell when the short term is down.

This is a very simple method of trading stocks and commodities on a daily basis, and if calculated correctly they will work. Combine this with the insight that candlestick charts give you and you can create a system that works for you.