November 6th 2007
How I Trade Support and Resistance
Support and resistance is a fundamental concept in trading. I would suspect most of the readers of this blog have at least a basic understanding of how support and resistance works in markets.
Here is a good definition of support and resistance. What I wanted to talk about is how I use it in my trading activities.
I trade with three fundamental attributes of support and resistance:
1. For me, support and resistance are zones, not finite numbers. The greater the timeframe, the more this attribute applies. I am looking at daily charts and longer, I draw the support and resistance zone as 1/4 ATR beyond the level of support. I expect that price will begin to change direction in this area. Combined with moving averages and certain patterns, like the hammer, this has worked well.
2. Support/resistance is validated by the number of times the zone is touched. Corey at afraid to trade used this “number of times touched method” as one measure to assess the validity of trend lines. I share his conclusions. When I observe price bounce off a zone of support and resistance multiple times, I know that zone is strong. It’s my interpretation that the higher the time frame (days, weeks, months…), the more powerful the zone has become.
3. Don’t forget pivots when trading intraday. Perhaps using pivots deserve their own article. Pivots are areas of support and resistance calculated from the previous day’s high, low, open, and close. The true value in the pivot numbers is that they are widely followed. The whole concept of support and resistance is that support and resistance holds because so many traders buy or sell when price hits a certain number. This is exactly why pivots are useful from an intraday perspective. Pivot points are generally calculated the same way. So when you look at a widely traded contract like the emini S&P, price will bounce, consolidate, and break around pivot points. Here is an excellent pivot point calculator.
Hope this got you thinking about how you use support and resistance in your own trading. It’s an easy concept to understand, so it’s easy to brush off as not as important.
Good Luck!
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9 Comments »
Bubs on 06 Nov 2007 at 8:05 pm #
Do you also daytrade or just swings? I read your comment on my blog about trading a similar style and was interested in some of style of trades you take.
Jonathan on 06 Nov 2007 at 8:13 pm #
I’m primarily a swing trader. I used to day trade quite a bit. Now I use intraday patterns to lower the risk of my swing entries.
In terms of intraday setups, I will be detailing them on this blog in the near future, but to give you an idea my setups are as follows:
OOPs Trades
Bear/Bull Traps
Range Contraction/Expansion
Hope this helps.
Bubs on 07 Nov 2007 at 6:31 am #
Thanks, look forward to the future post. I’m always interested in how other traders make money from this market
Another week, another Link Mash-up. Remember, if you have a story that you think is deserving to be on a Link Mash-up (comes out every Friday or Saturday), then send a link through the contact page. Your story must have something to do with business, stoc on 09 Nov 2007 at 10:49 am #
[...] I Trade Support and Resistance […] - A look at some of the ways to play support and [...]
The Stock Market Carnival - Nov 12, 2007 Edition on 12 Nov 2007 at 1:43 pm #
[...] presents How I Trade Support and Resistance, saying, “An understanding of the nuances of support and resistance is critical to successful [...]
Festival of Stocks - November 12, 2007 | My Adventures into The Street on 12 Nov 2007 at 2:56 pm #
[...] presents How I Trade Support and Resistance posted at A Trade A Day, saying, “An understanding of the nuances of support and resistance [...]
Merge Time Frames to Make More Money | A Trade A Day on 03 Dec 2007 at 1:03 am #
[...] are support and resistance on larger timeframes can prove to be very strong. This longer term support and resistance can influence how your trade plays [...]
Trading Bases | A Trade A Day on 12 Dec 2007 at 12:03 am #
[...] 2. Support and Resistance. I’m constantly mentioning support and resistance in my posts, but they’re important. I couldn’t trade without them. Typically, the best trades off bases will occur when the base hugs a line of support or resistance. When going long you want support to be underneath you and resistance far above you. The opposite holds true when shorting. [...]
Rob on 11 Jan 2008 at 5:29 am #
I strongly agree that support/resistance aren’t finite, but regions. Some feel when a candle shadow has broken support/resistance that we must look for new support.resistance. However when trading intra-day that may not be suitable due to scaling back the timeframe to find another peak.
I feel that a shadow break is simply a weaking in the up or downtrend, however often the candles following will continue to sit on previous support/resistance. It’s all a matter of opinion I’m sure. However, it works successfully for my day-trading currencies.