Identifying support and resistance is one of the first things we teach new traders. These levels are where you want to be trading.
Above you can clearly see there is a defined level of support at the $26.75 price and clear resistance at $29.50. These levels mean there are buyers at the support prices and sellers at the resistance prices.
Why this is important is because if we know we can expect buyers or sellers to show up at a certain price, then we can expect a bounce to profit from.
Now obviously this doesn’t work every time, but it puts probabilities in our favor which is our main goal as traders. It also provides you with a favorable risk/reward ratio with a defined stopping point.
If we buy at support then we know we are wrong if it breaks below that price and can exit the position. The same goes if we sell short off resistance.
A good set up for trading support and resistance levels is a breakout trade. This happens when a defined level of support or resistance forms and prices break through it.
There are a couple things you want to look for on a breakout trade:
- High relative volume (volume picks up compared to previous trading periods)
- Prices hold above/below the level (ideally it breaks out and comes back and tests that level and holds, that’s a good entry point)
Breakout trades are very popular because you can catch bigger moves and make more money, which is what we want!