Support & Resistance

Support and Resistance are an important part of both swing trading and day trading strategies. These two points do two things; first, they help you to decide how much you could potentially make on a trade and secondly they help you establish an exit strategy. It's vital that you have an exit strategy BEFORE you get in a trade and mine is usually dependent on where the support and resistance lines are as well as my 5% goal.

A support line is established where the lows have historically been stopping before rallying back up over a certain period of time. And a resistance line is the opposite: where the highs have historically hit before pulling back down to support. Support and resistance sort of pass the price point back and forth like a bouncy ball - they work in tandem if the stock is trending in a regular fashion. If you can't find a clear support and resistance line - pass. Do not trade this stock. If you don't know what it's doing... then it doesn't know what it's doing!

Now, if you can trace a nice, neat support line that follows lows that have been hitting at higher and higher points and a resistance line that has also been hitting at higher and higher points then you can be assured that the stock is in an uptrend. How do we know how much money we're possibly going to make in this uptrending stock?

Let's say that the past five lows that mark the support line are at $5.00, $5.50, $6.00, $6.50, $7.00 and that the past five highs that establish the resistance line are at $6.00, $6.50, $7.00, $7.50, $8.00. By drawing the support and resistance line at the aforementioned price points you can see that the distance between support and resistance as the stock trends up is about $1.00. So, thats tell you that if you get in at support and got out at resistance you have the chance to make $1.00 per share.

How do we know when to get out? Well, the stock's support and resistance tell you that historically between the last low and the next high you're most likely only going to get a $1.00 or so before the stock has a pullback down to support. It wouldn't make sense to set your exit strategy at $10.00 when resistance tells you that in the next few days it's only going to hit at about $9.00 before the next pullback.

SUMMARY:

Support and resistance outline how much room the stock has to move (in our example - $1.00) and it tells you what the next estimated high and low are going to be which should allow you to determine your exit strategy prior to purchasing. On an uptrending stock, generally support = entry and resistance = exit. If you're shorting a stock, then it's the opposite: resistance = entry and support = exit. Flat support and resistance lines mean that the stock is either a channeling stock or currently consolidating.

Swing-trade-stocks.com has straightforward visuals and a tutorial on how to determine support and resistance.