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Support & Resistance
Applying Support and Resistance:
Support and Resistance are pretty basic ideas that I believe people over complicate. Support is the price range at which buyers tend to step in and prevent a stocks price from going any lower (demand).Resistance is just the opposite, a price range at which sellers step in and prevent a stocks price from going higher(supply). Notice I use the term "RANGE"
The biggest mistake new traders make when trying to identify support and resistance is not understanding that there is a price range. Support and resistance will never be perfect, and playing them to the exact penny will only lead you into a loss. Just because you identify resistance at $4.00 you are not guaranteed a breakout or a break of Resistance because a buy is printed at $4.01. Nothing in trading is guaranteed and Support and Resistance are no exceptions.
Support and resistance are the keys to finding break out stocks. Once a major support or resistance area is broken with good volume, it shows significant strength in that direction. This can be applied for a stock that is going either up or down. These breakouts can be used to find entry points, set a stop loss, or confirm momentum in a trade your already in.
Role Reversal:
Never chase a resistance breakout or a support breakdown, most of the time a stock will pull back or consolidate after a major break.
When an area of resistance is truly broken, it will then act as support. The same is true for broken support, in that it will act as resistance. If you miss your initial entry, patiently wait for the pull back or consolidation for the best risk vs reward.
Below you can see how a significant resistance(R) area was tested multiple times before it was broken, then a large breakout occurred.
Secondly we can see an example of how a significant resistance area can become support(S) once it is broken.
Here is another example with the S&P 500. Here you can see how resistance turns to support and then back to resistance again each time it is broken.
Rules:
1. Support and resistance are not an exact price, but a price range
2. When a support area is broken it can become resistance.
3. When resistance area is broken it can become support.
4. Buy into support
5. Sell into resistance
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Support and Resistance Lesson Video!
