As a day trader and swing trader, technical analysis is my bread and butter. It’s the language of the trading world, especially short-term trading.
And maybe I take it for granted sometimes that everyone knows what I’m talking about when I use all the different technical terms: support, resistance, breakouts, breakdowns, key levels, etc.
But if you’re new, your head might be spinning, and you’re wondering, “What does all of this actually mean?”
Don’t worry…I’ve got you covered.
Today, we’re breaking down technical analysis for beginners—in particular support and resistance.
These are just the basics you need to know to get started.
Table of Contents
Why Do Support and Resistance Levels Matter?
Why does it seem like everyone’s talking about support and resistance every time a stock makes a move?
Support and resistance help us identify key levels where a stock is likely to react.
When we talk about resistance, we’re talking about areas where a stock repeatedly hits a ceiling. This means that every time it spikes, sellers come in and push it back down.
On the flip side, support is where buyers step in and prevent the stock from falling further.
Let’s look at a hypothetical example:
Say stock XYZ keeps steadily trending up throughout the year but just cannot break through $6 per share. Every time it spiked up to $6, it failed.
Why?
This is because of the bag holders, the traders who bought XYZ at the breakout but didn’t cut their losses when the stock pulled back.
These traders were stuck holding losses and waiting for the stock to come back so they could sell and break even.
Let’s say, the stock finally breaks through $6…
That’s when we see a big spike.
Why?
Those bag holders are finally green and want to add to their positions. Volume spikes and the price of XYZ pops along with it.
And once resistance finally breaks, it often turns into support.
The stock pulls back a bit, but instead of breaking down, it bounces off that former resistance level.
Risk Management: The Key to Success
A lot of traders go wrong when they don’t have a plan, and they don’t know when to stop out.
Let’s say you’re trading a breakout at $14, and you’re risking down to $12.
In this case, you’ve got a clear stop loss and a defined risk-to-reward ratio.
If the stock breaks below $12, you know the setup is broken, and you move on…
No hesitation, no hoping it comes back.
Always have a risk-to-reward ratio in your plan. The one I use is 3-to-1.
To learn more about the risk-to-reward ratio, read my blog post.
Use Support and Resistance to Avoid Becoming a Bag Holder
You need to understand support, resistance, and key levels.
If you’re buying a breakout, you need to know exactly where you’ll stop out if the stock reverses.
Don’t just blindly buy anything that’s moving.
Many traders do this because they don’t look at charts, they don’t understand key levels, and they don’t have a plan. That’s how they end up being bag holders.
Don’t want to be a bag holder?
You need a great trading platform that shows support, resistance, and other key levels…so you know where to buy in and where to set your stop loss.
It should include real-time data, charting, technical indicators, and more.
My top pick, and the one I use every day, is StocksToTrade.
It features everything mentioned above…PLUS, right now, you can get two weeks of both the STT platform and our Breaking News Chat service for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $17!
My Final Thoughts…
To succeed in day trading, you have to be a technical trader.
95% of your decisions should be based on the chart.
The best way to master this is through pattern recognition—and the only way to get good at recognizing patterns is to study charts until you know them in your sleep.
That’s what we teach here at StocksToTrade.
We have tons of free live webinars that run all day and offer trading tips and tricks, info on our Oracle trading system, and other valuable training.
And for more mentorship and trading strategies, subscribe to my StocksToTrade Advisory service today.
You’ll also get a monthly newsletter with a list of my top picks, three weekly videos with my watchlists, bonus reports, and more.
Sign up for StocksToTrade Advisory right here!
Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade