4 RELEVANT Types of Support and Resistance in Stock Trading

Part 3 of Our FREE ‘How to Trade Stocks‘-Guide

What are Support and Resistance?

Support and resistance are price levels or areas where you see a lot of buyers (support) or a lot of sellers (resistance). A stock has a high chance that price reverses at these levels; that’s why they are vital to learning how you can find them as they will become your most valuable tool in stock trading.

How do I find Support and Resistance?

Traders find support and resistance areas by looking at the past trading action. The more recent, the better, but also areas from years back can be of interest. Support and resistance are not only horizontal areas as you can see in the image above but also trendlines, moving averages and VWAP (Volume Weighted Average Price), which we will explain below.

Horizontal Support and Resistance

We prefer to talk about areas and not lines because nothing in stock trading is 100% exact. You will find the most important support and resistance areas horizontally. To define them, you look at a chart in various time frames to find price areas where the stock used to bounce. More often then not you see the price fluctuate around certain price levels.

Support and resistance are always areas not lines that are hit multiple times.

As you can see in the image above, price movement is far from precise. The more a price level is being hit and does not break, the stronger that price level is.

You will see a lot of support or resistance around whole and half numbers. Trading is a battle of money between people and people love whole numbers to place their orders. So always watch out for support or resistance at those price levels as price may bounce.

Support and Resistance with VWAP

VWAP (or Volume Weighted Average Price) is a trading benchmark that reflects the average price a stock traded throughout the day, based on both volume and price. VWAP gives a trader an indication of the trend and the value of a stock. When the price trades above VWAP it is considered as bullish, if it is below VWAP, it is deemed to be bearish. Hence, you can use it as a support or resistance line. VWAP is available with every charting software of the broker of your choice.

VWAP has become resistance hence price starts to sell off.

Support and Resistance with trendlines

Support and Resistance areas can not only be determined horizontally but also diagonally by using trendlines. Prices follow a trend that is either up or downwards. To draw a trendline, you connect at least two price levels where the price reversed. More often then not you will see price bouncing again when it approaches the trendline.

Clear resistance area where price gets rejected.
Previous resistance has become support after price shot above resistance.

There is also a high probability for the price to break up or down, when two support and resistance trendlines cross, or when a trendline crosses a horizontal support/resistance area).

Support and Resistance with moving averages

Moving averages are lines that are calculated by a pre-defined amount of candles. A lot of traders use exponential moving averages (or EMAs) as indicators to determine, where price could bounce. There are five crucial EMAs you should add with the charting software of the broker of your choice:

  • EMA (9) – Calculation based on 9 previous candles
  • EMA (20) – Calculation based on 20 previous candles
  • EMA (50) – Calculation based on 50 previous candles
  • EMA (100) – Calculation based on 100 previous candles
  • EMA (200) – Calculation based on 200 previous candles
Clear resistance area where price gets rejected.
Previous resistance has become support after price shot above resistance.

Please note that moving averages are lagging indicators! That means they calculate on the past data an thus they can’t be 100% accurate. You should only use moving averages in conjunction with other support and resistance areas.

Support can become resistance and vice versa

When a support level breaks and the stock price goes down with a lot of volume, then there is a high chance that the market retests the previous support level. If the stock does not have enough power to rise above the last area support, the support becomes a resistance Area. That means every time the price reaches this price point again, you have to respect it as a valid resistance area. The same thing applies the other way around when a resistance area breaks.

Clear resistance area where price gets rejected.
Previous resistance has become support after price shot above resistance.
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