Day Trading by Justin Kuepper

Author:Justin Kuepper
Language: eng
Format: mobi, epub
Publisher: TYCHO PRESS
Published: 2015-08-24T04:00:00+00:00

Figure 8. AAPL Resistance Level

In addition to connecting highs and lows, support and resistance levels can be determined by connecting highs with lows in a horizontal line. Figure 8 demonstrates how a prior resistance level turned into a support level. After breaking through the 27.00 level, AAPL bulls took over control from the bears and the prior resistance turned into a support level. Bulls will struggle to defend the support level, since a break could signal a trend reversal.

Round numbers represent other key areas of support and resistance, since they are important psychological levels in the market. For instance, many traders have probably heard financial media pundits discussing whether a popular index will hold a certain level—such as 10,000 for the Dow Jones Industrial Average—after a move higher. When prices rise to these levels, selling often intensifies as traders take profit off the table. Prices falling to round levels see the opposite occur, as traders take the opportunity to pick up shares.

Some day traders identify support and resistance levels at the beginning of the day, and trade based on those levels as their exclusive strategy. For example, a day trader may identify a $10.00 support level and a $15.00 resistance level and focus on entering trades near $10.00 and exiting them near $15.00 using volume as a key indicator of trend strength.

Support and resistance levels aren’t restricted to single lines either. In some cases, day traders may identify support and resistance zones, which consist of rectangular areas where struggles between bulls and bears intensify. These zones can be identified by looking for concentrations of highs and lows that may be within a price range rather than at a specific set price in general. While zones aren’t quite as helpful when setting specific stop-loss and take-profit triggers, they do provide an indication of what to expect.

Finally, day traders should be sure to look at multiple timeframes when identifying support and resistance levels. While traders tend to use short-term charts for their daily trading, it’s important to take into account any longer term support and resistance levels in order to avoid placing inopportune stop-loss or take-profit points. An example of where this could become a problem is if a long-term resistance level exists before a short-term resistance level where a take-profit is placed. In this case, the stock might prematurely reverse direction before the take-profit level is hit, and ultimately cause a losing trade as the stop-loss is triggered.

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