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Let's start with a definition of support and resistance. Support is an area of accumulation where the price of the stock is cheap enough so that people buy more (accumulate more) of the stock. Resistance is an area of distribution where the stock is at a price that traders deem to be too expensive or when they want to protect the profits they have earned, so they are encouraged to distribute or sell their holdings.
Traders who are able to successfully determine areas of support and resistance have the ability to potentially profit from market movements. Fear and greed are the two major driving forces for market movement. Those who are day trading online know that while there may be many reasons for purchasing and holding a stock, the overall market movement is based on human instinct. With that in mind, styles of trading such as day trading, swing trading and momentum trading all utilize support and resistance analysis for potential market gain. Here are some day trading tips to help you identify areas of support and resistance.
1) Identify a strong area for support or resistance.
Traders who are day trading stocks should look for the number of times that a support or resistance line has been tested. For example, if a stock has been at $40 eight times in the past six weeks and has also been at $45 three times during the same time frame, the stronger line is at the $40 price.
2) Identify horizontal and diagonal lines of support and resistance.
Traders may easily see horizontal lines of support and resistance, but they should also know that identifying a diagonal trend helps to forecast upward or downward movements of the stock. For example, the price might fluctuate daily, but if over an eight week period the price moves from $40 to $41 to $43 to $44 to $45 and so forth, traders are able to see a very apparent upward trend in stock price.
3) Identify when a support or resistance line has been broken.
If the stock prices falls below or climbs above the support or resistance line, the trend of the stock has changed. The stock might become bear, bull or neutral and day traders may need to rely on other indicators that are part of their day trading strategy to determine what action to take concerning the stock. A quick tip to help you identify if a trend change has occurred is by looking at the amount of the price difference between the support or resistance price and closing price. If the closing has at least a three to five percent difference from the support or resistance price, then most likely the line has been broken.
Support and resistance are important aspects of many day trading strategies. As you get more familiar with identifying these lines, you will strengthen your trading system and have greater potential to capitalize on market movement profits.
Volume is the greatest indicator of a group's motivation and typically works to support trends, breakouts and reversal patterns that may be seen with other indicators. Whether the trend of the stock is bullish, bearish or neutral, the motivation of the group that dominates the price movement is seen in volume.
One of the most important day trading tips traders should know is that average period volume demonstrates an average conviction of the market. Traders have to know who won the battle of the day – bulls, bears or neutral. If the bulls won the day, the price of the stock typically goes up, which is strengthened by a higher than normal activity motivated by greed. If the bears won the day, the price of the stock typically goes down and also, this position is strengthened by higher than normal activity and motivated by fear.
Traders typically analyze a stock's price fluctuations in their day trading strategy. They look for things like breakouts and trend reversals, but here's another element to incorporate – volume analysis. Stock price typically lags behind fluctuations in volume and as a result much information regarding market positioning can be obtained by looking for confirmations in volume.
Volume is a foundational tool in many day trading systems. Those who are day trading online simply have to look at a stock's volume and look for days where there is higher than average activity. A review of the stock price on those days will confirm price reversals and help traders determine if it's the right time to change their market position.
Accumulation distribution current is one of the ways to examine price and volume when day trading stocks. This volume indicator is a great way to filter the information from a trader's other indicator tools. For example, a trend on a MACD or stochastic may indicate a strength or a weakness for the current price trend, but when these indicators are combined with the volume indicator, the trend may be confirmed or not. The accumulation distribution current is based on the idea that if there is a lot of volume (activity) supporting a particular price move, then the price move becomes more significant.
On Balance Volume (OBV) is another volume indicator used in many day trading strategies. What OBV primarily tells traders is whether the price is moving up or down based on high volume. Basically, OBV takes an arbitrary number and adds to it the total volume of the stock on a particular day. If a stock price goes up, then the volume is added and if the price falls, then the volume is subtracted. Keep in mind that it is still important to review the price of the stock and look for confirmation of the trend. Using OBV, traders are able to review the overall strength of the market during price movements that support the trend that the stock is in.
Volume analysis indicators are great tools that support the technical analyses of other indicators. Traders should also know how the price trend is motivated so they can confirm the strength of their trade position and make any changes if necessary.