Online Stock Trading Tips

Support and resistance is the most successful trading strategy. Yet this very simple means of trading is actually overlooked by most traders. The primary reason is that they do not know how to effectively find the support and resistance of specific stocks. This tutorial will teach you completely how you can be able to accurately determine the support and resistance levels for different trading time-frame.

Fact1: Different Support and Resistance levels exist for different time frame. For example if you are a day trader, you should also be looking at the support and resistance levels of that stock in a daily chart. If you trading based on monthly charts, you should also be looking for the support and resistance for the monthly/yearly chart, so on and so forth. For each of these time frames; you can have different support and resistance values which you should keep in mind. Some support and resistance basics:

Support: The lowest price possible for the stocks in a specific time frame where there are more willing buyers than sellers. It cannot go down further since the presence of buyers in this level is greater than the sellers. Thus the only direction for this price is to go up.

Resistance: The highest price possible for the stocks in a specific time frame where there are more willing sellers than buyers. It cannot go further up since the presence of sellers in this level is greater than the buyers. Thus the only direction for this price is to go down.

Fact2: When a price is said to break the resistance level and further goes up, the old resistance becomes the new support. Or when a price is said to break the support level and further goes down, the previous support is the new resistance level.

Fact3: Support and resistance is driven by the law of supply and demand. When the price is low there is less demand for the product. But at its lowest point, this attracts investors because the price is so attractive which result to increased demand as well as the price. When the demand is becoming less because more investors are selling the stocks, the price will go down- this will happen at the resistance level.

Illustration1 (Day trading): Find the support and resistance of Google Stocks (GOOG) today (As of July 28, 2011) in a day chart basis.

Step1: Go to your charting software, enter GOOG for stock symbol and retrieve the stock charts.

Step2: Adjust the chart to provide daily results (5 days results for example). This is the output using Yahoo finance stock chart tool:

Step3.) Now that the chart has been provided, determine the support and resistance levels. Based on the provided chart, can you spot the support and resistance level based on the definition provided? Well, it is obvious that the resistance level is around $625 because the price did not further go up but instead go down. Where is the support? The support is around $605. Once technique is that at the price of support and resistance levels is where it stays or hold on for some time more any other price. For example the $605 support is consistent for two straight days from July 21 to July 22; while the $625 resistance is consistent for two straight days from July 26 to July 27.

Step4.) Supposing you are a day trader; if you are a trading long, buy at support and sell the stocks at the resistance level to get the profits. If you are trading short, sell at resistance and buy at support to get profits.

Illustration2 (Long term trading): Supposing you are a long term trader who will be interested to buy and sell stocks only a very few times per year; you should not be looking at the day charts. Instead you will be looking at the long term charts also to accurately determine the support and resistance lines. In this case, try switching to a one year chart so that it will reveal the monthly results. This is how it looks like with GOOG stocks:

In the long term chart, it is obvious that the resistance level fall somewhere $630 to $640 while the support is around $460 to $480. As you can see, you obtain different support and resistance values depending on the chart time frame.

How do you trade using support and resistance in the long term? Most long term traders are actually buying at support and selling at resistance. It is very risky to trade short with long time span. In this case, if you are trading Google; it looks like you should wait for the $460 to $480 support level to happen then buy at those prices. After many months, you can sell the stock if it reaches back again to the resistance level of $630 to $640.

Sample calculation: Supposing you want to buy 1000 shares of Google stocks.

Buy at support- 1000 shares x $480 = $480,000
Sell your stocks at resistance level= 1000 shares x $630 = $630,000
Profits from stock trading= $630,000 – $480,000= $150,000 (not including broker commissions)

What about moving average, Bollinger bands, etc? Forget it and stick to support and resistance – its simple, easy and proven way to make money in stocks.

Related posts:

1. Support and Resistance Trading
2. Trading system that works: Support & Resistance
3. Use moving average to determine the support and resistance of S&P 500
4. Calculating Stop loss price using Risk & Reward|Support and Resistance
5. Stock Trading 101 : Basic Definitions

This entry was posted on Thursday, July 28th, 2011 at 5:37 pm and is filed under Trading fundamentals. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.