How To Use Support and Resistance To Create a Trade Plan

Let’s look at an easy way to create a trade plan using support and resistance.

Now, there’s a lot that goes into technical analysis, but at the end of the day what really matters, what we really focus on, is support and resistance.

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But I’m NEVER selling. Here’s why…

The Big Picture

With penny stocks, we’re looking for low-float stocks with crazy volatility. Then, looking at the chart, we key off of the technical levels.

Now, there’s a lot more to it than that, okay? You should have a good working knowledge of technical analysis.

But if you took all of technical analysis and boiled it down to its core elements, it would be support and resistance.

It’s really our data. We also form a trade thesis around it. The chart, the thesis, and the trade plan go together.

Use Support and Resistance To Identify Range

If you’re watching a stock and use technical levels, you can see the range it’s trading. You can use that range to create a trade plan.

The range tells you how much size to put on.

For example, in early premarket trading on Friday (July 24) Advanced Biomed Inc. (NASDAQ: ADVB) had a pivot point near $16.80. As it traded higher, that became support. There was resistance at $19.85.

Assuming your plan is to trade the breakout over $19.85, that’s a wide range.

Now, you could tighten up your risk, but for the sake of simplicity, let’s say you set your risk at the pivot point.

Since the range, based on support and resistance, is wide, you’re going to size down because you understand your number.

You do have your number, right? Here’s what I mean…

Your ‘Number’ Is the Max Dollar Loss Per Trade

You have to know your max acceptable dollar loss per trade.

Now, I know a lot of traders talk in percentages. That’s not a smart way for most people to trade.

You can’t pay the bills with percentages, okay? You pay your bills with dollars. So, what’s your max acceptable loss in any trade?

Now, once you know your number and key support and resistance levels, that allows you to create a trade plan that includes your position size.

Remember…

The Trade Plan Has Several Parts

1. We map out the technicals
2. We form the thesis
3. We write the trade plan
4. We decide if the trade plan has a good risk-to-reward that makes it an actual executable trade

Then we take the trade plan, run it through the number to give us our position size so that we trade the appropriate size based on the risk-to-reward of said stock.

My Take

You’re not going to trade a stock with a wide range with the same position size as, say, trading a $1.20 stock with a 10-cent stop on, okay?

Going back to the ADVB example, if my max loss is $100, and the range is $3.05, then I’m only going to trade 32 or 33 shares. This is just a hypothetical example, but you get the idea.

Watchlist

Going into Friday ADVB was on its sixth day of the run. It was also at a squeeze point.

Depending on what it did on Friday, I’ll consider trading it using the support and resistance ideas we’ve covered. Here’s the chart from the start of the run after-hours on July 17, to the premarket squeeze on Friday:

I really like the whole dollar, half dollar levels on ADVB.

On My Radar

• Must read: a taste of hacking in the age of AI
• OpenAI’s response to the incident. I might have to turn Higgins into RoboCop
• The FOMC rate decision drops Wednesday (July 29)
• As always, my go-to book on technical analysis