Traders Toolbox: Support and resistance

Although many of you will find this lesson in one of the most basic concepts of market behavior "old hat", it never hurts to review. One of the first things a new trader is told (I hesitate to say learns as many never do) is to buy a breakout above resistance and sell a fall through support.

Resistance is the level which holds a market down, while support is an area which props up a market much like a ceiling and a floor. The key is to identify the critical levels. There are a number of methods to determine support and resistance: trendlines, moving averages, retracements, Gann angles, etc. However, simple observation can be an effective means of locating the important areas. A quick glance at the October cotton chart reveals the most basic levels of support and resistance (broken lines).

A previous high often provides resistance, while an earlier low tends to offer support. Support or resistance levels are not necessarily flat. For example, trendlines reveal areas of rising support or falling resistance. Also, when broken, uptrend lines offer a new level of rising resistance, while the opposite is true for downtrend lines. In fact, virtually any broken area of support will become resistance and vice versa. After breaking a level of support (or resistance), the market commonly comes back to test that level before resuming the downmove (upmove). This may be the single most effective method of locating low-risk entry points for trading purposes. This lesson may seem like wasted space to the experienced. However, it is amazing how often traders simply forget (or ignore) the power of basic support and resistance levels. This concept can be very profitable, but it may be just too "easy".

31 thoughts on “Traders Toolbox: Support and resistance

  1. I agree totally with the concept of buying retests of resistance
    and selling support breaches. It's to easy to get caught up in false
    market moves and it is ill-advised to advise anyone especially
    those new to the markets to jump in or out of the markets every time
    resistance or support is broken.

    Erick Tippett
    Chicago, Illinois

  2. This is really a very good attempt to understand the market's behavior better. Thanks, Adam! WHY somebody is willing to sell you stocks (when you expect the up trend) if they are going to go up? This is irrational, isn't it? Why would not they hold on to the stock and sell it later with higher profit. However, some time later you will be stopped out and will give up the position only to watch how the price will re-take the original direction with you kicked out of the market. I suppose that adding more of the background ideas to the articles will enrich them and help building the trader's mentality from the ground up.

  3. I completely agree with Alan Lovelace; using some kind of indicator along with support and resistance lines make a solid foundation for any trading plan.

    I've been using the Fibonacci retracements drawn from support / resistance levels in all of my "State of the Dow" articles, so far with pretty good accuracy. I usually don't like to link spam, but here's a link to those articles just for conversation sake:
    http://recordpricebreakout.com/?s=state+of+the+dow&x=0&y=0

  4. Hi Adam,

    What should we do if we bought at the breaking of resistance but it happened to be a trap and the price went back below the breakout point again?

  5. I can use closer stops by trading one and two bar candlestick formations and thus significantly reduce my potential loss while maximizing my risk/reward so this is a trading method I don' use.

  6. My recent trading has been on the loosing side, I am trying to learn any system that might work. Another problem is my portfolo is too small for professional help. I have enjojed the information on this.

  7. For a "first" post in "Trader's Toobox" series that's a great effort Adam. Good to be reminded ofthe basics. If I might be so bold ... if you are planning to discuss indicators (eventually) could you throw in a bit about the correct places to use them, as well as their weaknesses.

    Too often we tend to grab and use a favourite indicator, not realizing the application might not be entirely suitable in this instance. For example the choice of MACD versus Stochastics in trending/non-trending markets.

    But thanks for a great innovation here - I will be sure to catch every post. Trader's Toolbox - thumbs up here!

  8. Your contribution to the trading world is priceless Adam. However basic some of these posts may appear to the experienced, there are always newcomers who can benefit from them tremendously, not forgetting the forgetful who can use them as revision.

    traders toolbox is invaluable. keep up the great posts.

  9. how about a toolbox tip on time-frames for setting s&r levels--for example how about sugar( is it seasonal?) or Ford stock (it's in a down trend-is there a support some where in the past?)or the Dollar?

  10. This reminder of Support and Resistance concept of trading for newbies as well as for experienced traders is timely.

    The markets have been chopping around lately and unless one can pick the levels correctly, one will be burnt.

  11. Hi Adam -

    Your blog on support and resistance serves as a great refresher/reminder. I also keep the sentiment of traders in mind.

    Basically, just subscribe to MarketClub, and follow the direction. Makes life easier. Wouldn't be without it.

    Always look forward to your blogs.

  12. I like all the post on market club. I read each and every one of them. What I get from them is ideas and possibilities. Then I trade them in my own way and use a stock that works for me. Market club is a great site and the people here seem to be more positive than some other sites. What I am now concerned about is the push lately to make people feel like there getting something they can't do without. Usually means prices are going up. I don't actually use the trade triangles to get in and out of trades. I have my system and it has been successful for 4 1/2 years now. I'm not changing till it needs changing. Please don't misunderstand me, this is a great site, but I leave places that charge unfair cost and will regret when the price goes up and I have to wave goodbye!

  13. Well, I agree with u upon the support and resistance, but we should not forget the framework of fundamentals that necessarily drive these moves (as promulgated by the efficient market hypothesis) ,which finally make one decide whether a move is likely to be supportive or resistance. I think this equipment is more to determine the possibility where we should buy/sell rather then barely predicting the upcoming direction and it should be combined with the other indicators (e.g volume)

  14. I notice on all your charts from 1 minute up to 1 hour you have support and resistance lines automaticly drawn in. Maybe an article on this can be done.

  15. In any given successful trade the basics of support and resistance really plays a big role. Ignore it and you pay the price.This is one of my best tools in my trade box and I am glad Adam is sharing this with everyone. Thanks.

  16. Support and resistance are specific price areas or price levels which either support prices on declines in up trends or which resist prices on rallies in down trends.
    If support and resistance levels cannot be determined, then you cannot define concise levels in which to establish entry or exit positions in your specific trade.
    Determining support and resistance levels are somewhat different for the day trader than the position trader. This is because support and resistance levels for the day trader must be closer to the current market price that they are for the long term or position trader.

  17. Hi Adam,

    I am a new member with a 1-year previous trading experience and I find your training videos fascinating, particularly because you take into consideration the fact that we are all at different levels--trading skill wise. I have been watching your videos for a while, and every time I find something that reinforces my knowledge or teaches me new tricks of the "trade;" and that is why I decided to join the Market Club.

    Best regards,

    Carl

  18. Like your post on support & resistance/where to buy etc...always good to keep the basics in mind when trading....loose sight of fundamentals and you'll end up loosing a whole lot more....I would like to see a post or hear from others on using market club trade triangles on trading options with equities as the underlying....

  19. I really reach a similar opinion as Dave. Sometimes we need to be more patient to react to W
    those condition. Without it how would we know is it a valid move or not. Sure i will loss some few good profit, but i still can catch another 70% of the move.

  20. I like your traders toolbox ad all your videos and comments. Yours are the only notions about trading I've ever encountered that make sense (aside from the technical analysis books of past years)

    I find the support resistance, buy / sell points a lot easier to see in hindsight, rather than at the time when the trade should be made. I guess that's just the nature of the game. I'm also not clear on your market club comments re triangles how much money you spend on trading commissions when calculating your implied profits? a lot of money can go up in trading smoke if you're forced to jump in and out too quickly.
    Donato

  21. A useful reminder, particularily because support and resistance levels are dynamic. Patience is key as noted above. It is important not to jump the gun as support or resistace levels begin to be tested.

  22. I think you should post this for new oil traders once a week. LOL I will admit it was hard for me at first to "get it". As a beginner I think you feel like you are buying high because you don't recognize it is the start of the momentum. Thanks for a great post!

  23. Seems very basic, however it never hurts to review the basics and get "re-aligned". Keep up the good works and I look forward to the next Toolbox article.

    P.S. I really like the Market Club

  24. Indeed I agree with the reply given by Mr.Mike about buying & selling of shares. In our India markets where prices moves on mere speculations than fundamentals. So for to be safer on side keep a close watch on support prises & resistance. But the major problem here is who can calculate yhe real support prise.

  25. This is more sound than my current strategy of buy high and sell low. Seriously, I enjoyed the blog and am looking forward to other topics -- especially how to best exit from a position that is not going in our favor (ie. Long Iron Condors, strangles, etc).

  26. While I am in total agreement with Adam - support and resistance areas are amoung the easiest indicators to observe, they are also some of the first to be ignored by some traders/investors due to impluse buying/selling. Which is why I really like to monitor a stocks chart with the Fib numbers on MarketClub; using the Fib numbers in conjuction with the areas of support/resistance tends to make me more patient and when conformation of those support/resistance levels are confirmed it adds to my confidence in making the trade.

  27. Areas of support and resistance are great places to buy, and to sell. A good process to follow is to identify potential S/R points on a chart, then set alarms or alerts which warn you as the price aproaches the point. That way, the trader can monitor many stocks without having to continually scan the charts. When the alarm email or bell sounds, the trader then has the opportunity to evaluate if the movement is likely to breach or stop at the S/R point, and trade accordingly.

  28. While I agree that buying the breakout and selling the breakdown are profitable strategies, I do not like to chase price moves. I prefer to trade the retests of broken resistance or support. Sure, I will miss a runner sometimes, but by trading the retest, I have a tighter stop and am less likely to get in at the top or bottom of a false breakout.

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