Support and Resistance Levels
How to Determine the Strength or Weakness
One critical analysis for every aspect of a trade is the Support and Resistance levels in the stock chart. Technical Traders need to understand that it is not only the amplitude of the sideways pattern, or the uniformity of the candlestick patterns, but also WHERE the sideways price pattern it developed in a prior Uptrend or prior Downtrend.
Support is important when entering a stock. The strength and solidity of the support level indicates which Trading Style and its pertinent Strategy should be used for lowest risk on entering the stock. The stronger the support level is the more opportunities, and less risk on the entry.
Resistance is important to decide when to continue holding, and when to exit a stock prior to an impending retracement or market correction. Unfortunately most Retail Traders are taught to just try and get 10 or 25 cents out of a trade, and leave 80-90% of the profit of a trade behind exiting too soon. By learning how different resistance patterns will impact the stock run or Uptrend a trader can hold longer for much higher profits, lower trading costs, and controlled risk that eliminates the uncertainty of when to exit.
Please see the chart example below for the DuPont Co. (NYSE: DD) with lines drawn in green for support and red for resistance levels.
Support and Resistance levels are usually classified into the 3 following types:
- Weak: best used for Intraday or Swing and Velocity trading.
- Moderate: ideal for Position Trading, Options Trading, and holds that last for more than one month.
- Strong: best for Long Term Investing and Pension Fund Investing.
Weak Support and Resistance tend to be shorter duration sideways action that is very close to the entry or exit. This is best for trades that are only a few minutes to a couple of days as any retracement caused by profit taking can take out the support, and any speculative action can move right through weak resistance.
Moderate Support is usually found within a Dark Pool Platform sideways pattern which offers significant support for Position Trading, that most part-time traders use as the hold time for a week to several weeks.
Moderate Resistance is used as a target Point Gain Potential calculation, and as a potential exit point for Position Traders.
Where the Weak, Moderate, or Strong Support and Resistance levels form is crucial to determining whether they will hold or be broken through as the stock moves up or down in its current trend. Understanding who created the support or resistance also helps traders identify whether the support or resistance will hold for their particular Trading Style, Goals, and Point Gain Potential, keeping risk low and letting the stock run.
Martha Stokes CMT