Support and Resistance for Day Traders

Tyler Stokes

As someone who is studying to become a full-time day trader, you know that learning the basics of technical analysis is essential.

Imagine being able to predict where the price of a stock might reverse or pause, giving you the confidence to make informed trading decisions… By mastering support and resistance, you can gain an edge in the market, helping you to spot opportunities and manage your trades more effectively.

In this article, we’re going to explore the fundamental concept of support and resistance for the beginner day trader.

To start, I decided to ask Grok, the AI tool from X to give us an engaging definition:

Imagine you’re a mountain climber (the price of an asset) scaling the treacherous peaks and valleys of the financial markets. Now, imagine there are two magical lines that help you on your journey. One line is a safety net that catches you when you fall (Support), and the other is a ceiling that stops you from going too high (Resistance).

Support and resistance are like your trusty climbing gear. When you’re falling, support is the rope that stops your descent and gives you a chance to catch your breath. It’s the level where demand for the asset is strong enough to prevent the price from declining further.

On the other hand, resistance is like that annoying branch that keeps poking you in the face when you’re trying to reach the summit. It’s the level where selling pressure is strong enough to stop the price from rising further.

These lines aren’t static, though. As you climb higher (or fall lower), the support and resistance levels can change. Sometimes, they even switch roles! It’s like the mountain is playing a game of musical chairs with your climbing gear.

So, next time you’re analyzing charts, remember the story of the mountain-climbing price. Support and resistance levels are your friends, guiding you through the unpredictable terrain of the financial markets.

What are Support and Resistance?

Support and resistance represent areas on a price chart where the market tends to reverse its direction or pause. Support is a level where a declining market finds buyers and begins to rise, while resistance is a level where a rising market encounters sellers and starts to fall. These levels are crucial for traders to identify potential buying and selling opportunities.

The charts below are from the charting platform TradingView. You can sign up and use their software for free.

Visit the official website here: TradingView.com

support and resistance levels
Image source TradingView.com

Why Support and Resistance are Essential

Many new traders often overlook the importance of support and resistance, focusing instead on more complex indicators like Fibonacci levels, Bollinger Bands, or MACD. However, support and resistance provide basic yet powerful insights into market sentiment and behavior. They highlight where the market perceives value and reacts accordingly, making them invaluable for making trading decisions.

How to Identify Support and Resistance

Support and resistance levels can be identified across various time frames, whether you’re looking at weekly, daily, hourly, or even minute-by-minute charts. A level becomes resistance if the market fails to break through it and reverses downwards. Conversely, a level becomes support if the market holds above it and bounces back up.

support and resistance
Image source TradingView.com

Practical Application

Traders can use support and resistance levels to make trading decisions. For example, if the market is approaching a resistance level and fails to break through, this could be an opportunity to sell short with a stop-loss above the resistance. If the market is nearing a support level and holds, it could be a buying opportunity with a stop-loss below the support.

Support and resistance work across all time frames and markets, making them versatile tools for any trader. Whether you’re trading Forex, stocks, or commodities, understanding these levels can help you anticipate market movements and make more strategic trades.

Psychology Behind Support and Resistance Levels

Support is a price level where a downtrend can be expected to pause due to a concentration of buying interest. It indicates that buyers are willing to purchase the security at that price, creating a “floor” that supports the price.

Resistance is a price level where an uptrend can pause due to a concentration of selling interest. It shows that sellers are willing to sell the security at that price, creating a “ceiling” that resists upward movement.

Traders at Resistance:

  • Long Traders (Holding Positions): Traders who bought earlier and are holding onto their positions might see the resistance level as a potential point to take profits. They may sell their positions at this level, contributing to the selling pressure.
  • Early Sellers: Traders who sold too early might regret their decision as they see the price rising to the resistance level. If the price surpasses the resistance, they might buy back into the market to avoid missing out on further gains.
  • Short Sellers: Traders who have taken short positions expecting the price to fall may see the resistance level as a safe point. If the price breaks above the resistance, these traders might cover (buy back) their short positions to cut their losses, adding to the buying pressure.

Breaking of Resistance

When the price breaks through a resistance level, it signifies that the buying pressure has overwhelmed the selling pressure. The combined actions of early sellers buying back in, short sellers covering their positions, and new buyers entering the market push the price higher. This momentum can cause a sharp increase in price as the resistance level turns into a new support level.

Traders at Support:

  • Long Traders (Entering Positions): Traders may see the support level as an opportune point to buy, believing the price will not fall further.
  • Early Sellers and Short Sellers: If the price falls below the support level, it signals that the selling pressure has overwhelmed the buying pressure. Traders who were long might panic and sell their positions, while short sellers might gain confidence and increase their short positions, driving the price down further.

Breaking of Support

When the price breaks below a support level, it often leads to panic selling from long traders and increased short selling. This creates a downward momentum, causing the price to fall further as the support level turns into a new resistance level.

When Support or Resistance is Broken

When resistance is breached it becomes support, and vice versa.

Here’s an interesting take on what happens if a stock moves past a resistance point, or falls below a support level.

I noticed that the explanation in this video is very similar to this explanation from the Technical Analysis of the Financial Markets textbook:

Role Reversal of Support and Resistance

When a resistance level is broken, it often becomes a new support level because the psychological dynamics change:

  • Traders who missed the initial breakout might look to buy at the previous resistance level, now seeing it as a buying opportunity.
  • Traders who took profits at the resistance might re-enter the market if the price retests the previous resistance level, now as support.
  • Short sellers who covered their positions might also look to re-enter the market on a retest of the previous resistance level.

Similarly, when a support level is broken, it often becomes a new resistance level because:

  • Traders who bought at the support might sell if the price rises back to that level to minimize their losses.
  • Short sellers might add to their positions if the price rises to the broken support level, now seeing it as a selling opportunity.

Understanding the psychology of support and resistance helps traders anticipate market movements. Resistance levels break when buying pressure overwhelms selling pressure, and support levels break when selling pressure overwhelms buying pressure. The role reversal of these levels is driven by the actions and reactions of different types of traders, including long traders, short sellers, and early sellers. Recognizing these patterns can help traders make more informed decisions and better predict price movements.

Also keep in mind that these patterns do not work perfectly and don’t always happen in this exact way. When these levels are broken, it doesn’t always mean that the trend will continue higher or lower.

Here’s a Quick Recap

In the world of technical analysis, support and resistance are like the invisible hands guiding the price movements of financial assets. Think of support as the floor of a room and resistance as the ceiling. When the price of an asset reaches the support level, it’s like hitting the floor – there’s a tendency for the price to bounce back up. When the price reaches the resistance level, it’s like hitting the ceiling – the price may bounce back down.

Support and resistance are crucial for day traders because they help identify potential entry and exit points. If the price is approaching a known support level, it might be a good time to buy, as the price could potentially rebound. On the other hand, if the price is approaching a known resistance level, it might be a good time to sell, as the price could potentially fall back down.

These levels aren’t set in stone, though. They can change over time, and once a support or resistance level is breached, it can flip roles. If the price breaks through a resistance level, that level can become a new support level. If the price falls below a support level, that level can become a new resistance level.

Keep in mind, there is always the advice that you should trade the trend. Eventually learning specific trading strategies will help you make informed decisions on whether to trade around support and resistance levels or follow the trend. By understanding both approaches, you can choose the best strategy for each situation, increasing your chances of success in day trading.

So, to sum it up, support and resistance levels are like the invisible walls in a financial market that help guide price movements. They’re crucial for day traders to understand and can help identify potential trading opportunities.

What’s Next?

Next we want to discuss trend analysis by reviewing our discussion on trends and trendlines with our new knowledge of support and resistance. So let’s jump to the charts and see how all this fits together.

About the author

Hi I'm Tyler Stokes. I started my day trading journey in 2024. As a pure beginner I decided to document everything on this website. I plan to share all the ups and downs of becoming a day trader on this website and through social media.