Section 1: What Are These Levels Everyone Talks About?
The Support and Resistance are specific areas on the Technical Chart that represent a huge buying or selling pressure respectively.
The Support
The support price is where there is potential buying pressure. The bulls are at work and a large of traders are willing to buy at that price. This creates lots of demand for that particular stock and the prices bounce back up. Therefore, the area acted as a support. It did not let the price dip below it. The support level is always below the current market price. It is one level participants look out for during a falling market. It acts as a huge trigger to buy.
The Resistance
Resistance price is where there is potential selling pressure. The bears get to work and a large number of traders are selling. This also creates more supply of that particular stock. The stock price bounces back down. This area acted as a resistance. It did not let the price rise above. The Resistance level is always above the current market price. It is a level participants look out for during a rising market. It acts as a huge trigger to sell.
What are Pivot Points?
It is a technical analysis indicator, that determines intraday support and resistance levels. It takes into consideration. A Pivot Point is calculated by taking into consideration the previous day’s OHLC (Open, High, Low, Close) data. After that, three support and resistance levels are calculated and displayed along with the Pivot Point.
Here’s the calculation (for geeks):
Pivot = Previous Day (High + Low + Close) / 3
Resistance Level 1 = (Pivot x 2) – Previous Day Low
Resistance Level 2 = Pivot + (Resistance Level 1 – Support Level 1)
Resistance Level 3 = Previous Day High + 2(Pivot – Previous Day Low)
Support Level 1 = (Pivot x 2) – Previous Day High
Support Level 2 = Pivot – (Resistance Level 1 – Support Level 1)
Support Level 3 = Previous Day Low – 2(Previous Day High – Pivot)
Support and Resistance Can Also Be Dynamic
Support and Resistance levels are not just static lines on your chart. They can be dynamic ALSO. They can change over time. There are 2 ways you can identify dynamic support and resistance levels:
- Moving Averages: You can plot the 100 SMA and the 200 SMA on your chart to form a support level for the price. If you are an intraday trader, you can use a shorter time period, whatever suits you the best.
- Trendlines
If you look at a chart closely, sometimes you can make a trendline. These trendlines often act as a dynamic resistance level.
Section 2: Drawing Support and Resistance Levels
This is a quick guide on how to draw support and resistance lines.
Step 1: Define your chart
Based on whether you are a swing trader or a day trader, you can plot 12-18 months or a 3-6 months chart. Compress your chart so you can have a full view of the price patterns, the highs, and lows, etc.
Let’s look at a chart with 6 months of compressed data. Now circle out the sharp reversals. Also, circle out the ones where the price should’ve continued the trend but hesitated to move further and reversed.
If you see the image below:
- Circles 2,4,7,9 are the ones that showed some consolidation and hesitated to continue the trend.
- Circles 1,3,5,6,8,10,12,13 are the ones that showed a sharp reversal of the trend
Now, all we need to do is find the points with the highest number of reversals. In the image below, you can see the area of resistance has been marked in light yellow and the area of support in light blue. These lines indicate the area where you have a high chance of reversal or where the price faces a major turn of events. Also, going by the rule, support is always below the current price and resistance s always above the current price.
Note: It is always better if you see Support and Resistance as an area rather than one single line. When you visualize these lines you run the risk of approximation. Sometimes, the price tends to cross the Support line or the Resistance line by a few points before it reverses. Therefore, always keep room for error. S&R shouldn’t be taken as an absolute established area. Although, if you recall the first rule of Technical Analysis, “History repeats itself”, you can say that the S&R might be reasonably honored.
Section 3: Trading Support and Resistance Levels
They say to put your Stop Loss at the S&R levels. Just think for a moment. If you set up your Stop Loss at the exact S&R levels, it will definitely get hunted. Those are the exact levels where the price tends to reach and then reverse every single time. Hence, every time the price reaches that level, your stop loss will also get triggered.
As explained in the previous section, S&R is an approximate level. Hence, you should always set up your Stop Loss or Target Profit with a little more room. Look at the image below.
If you look at the image closely the target profit gets hunted repeatedly with no room to book better profits. This is a great way to get disciplined and not get too greedy regarding better profits. But sometimes, if you leave some room, you might not regret it later.
The blue circle represents the area where the price never hit the target profits level. It then reversed majorly. The yellow circles represent the areas where the price went way above the target profit level, thereby, it becomes a missed opportunity.
Trading at S&R levels gives you a good edge to earn as well as just the right amount of risk you might be taking. But there’s a click to it. Let’s look at it.
If you look at the image above, the white line represents the long entry position you might have taken. It is far away from the stop-loss and thus offers the same amount of risk and reward.
But if you look at the image below, the entry position is taken closer to the stop loss. This offers a much higher reward-to-risk ratio.
So, what was the major difference between these two types of trades?
Patience. You waited. You waited for the price to reach a level where it’d best be suitable. Instead of jumping into entry positions and taking a much bigger risk, it is always important to wait it out.
As you trade, you will come across a lot of strategies like these. It is important to combine technical analysis with discipline.
Next, let’s quickly look at the areas where S&R tends to breakout:
- During a strong uptrend – Since the buying pressure is high, sometimes, the price breaks out of the resistance and continues with the uptrend.
- During a strong downtrend – Since the selling pressure is high, sometimes, the price breaks out of the support and continues with the downtrend.
- After the price is consolidating for a while – If the price consolidates near the support, it means that the bulls failed to push the price up. The selling pressure is higher and the price breaks out of the support. The same happens with resistance. If the price consolidates near the resistance, then it means that the bears are weaker and the price breaks out of the resistance.
In the next section, we will be looking at how to trade S&R levels with Streak!
Section 4: Trading Support and Resistance Levels with Streak
Streak’s Technical section offers a quick view of the Support and Resistance levels of an instrument. The in-depth technical summary also shows whether an instrument is bearish or bullish on its trend.
This makes it easier for you to understand the market trends. You also create baskets and have a glance at all the stocks together.
Now, let’s see how can we trade Support and Resistance levels on Streak using Pivot Points. Navigate to your strategy builder and enter the following conditions:
To Buy: Close (0) crosses above Pivot Point (S1,standard,No)
To Sell: Close (0) crosses below Pivot Point (R1,standard,No)
Section 5: Trading S&R Breakout with Pivot Points on Streak
We know that price usually bounces between Support and Resistance levels until it finally breaks out of either of the two levels. This usually happens when a strong trend is in place and making it possible for the price to break out of either of the 2 levels.
Suppose there’s a strong uptrend and the sentiment of participants pushes the price up, it will break the immediate resistance level and tend to reach out for the subsequent resistance levels.
If you look at the image below. The chart is of Tata Motors. There is a huge buying pressure and a major uptrend in the price. You see that the piece has the potential to breach R1 as well as R2.
Hence, these are the conditions you may use to execute your trades on Streak:
To Buy at R1: Close (0) crosses above Pivot Point (R1,standard,No)
To Sell at R2: Close (0) crosses above Pivot Point (R2,standard,No)
Section 6: Scanning for Support on Streak
How do you scan stocks that tested their support levels on Streak?
It’s very simple. Look at the image below. There is one candle that tested the support level and then shot back up. The long shadow on the bottom shows that the buying pressure was really high after the candle hit its low. Maybe, the next candle might open higher and the price is in an uptrend.
So, to find such stocks, you need to put the following conditions on your scanner:
Candle Low Lower Than Pivot Point (S1) – this confirms that the candle tested the support S1
Candle Close Higher Than Candle Open – this confirms it’s a bullish green candle
Candle Open Higher Than Pivot Point (S1) – this may be optional and confirms whether the candle started out above the support S1
Section 7: Scanning for Stocks Near Lowest Price in The Period
There is another way to trade the support level. You can always consider the lowest price as a promising support level. If you look at the image below, the blue circles represent the lowest price point. Now, if you want to check when the price breaches the lowest point, you can make a scanner as follows:
Close lower than Period Min {100, Low(-1)} * 1.005
Close higher than Higher Than Period Min {100, Low(-1)}
This brings us to the end of this chapter. We will see in the next one.
– Happy Trading 😊
