Trading Strategy: Support and Resistance

[00:00:00.07] - Speaker 1
Another important pillar of our strategy is support and resistance. In this lesson, we will go through some practical examples on how to use market structure to improve our odds of success and show you how we select stocks based on support and resistance. Analysis. Supply and demand and the analysis of market structure allows us to better manage our trades and improve our overall strategy. We use various tools to find support and resistance levels.

[00:00:29.05] - Speaker 1
Support and resistance zones, moving averages as support and resistance, volume profile, chart patterns and breakouts, maximum and minimum levels and more. What do we look for when selecting these zones or areas of interest that can become points of support and resistance? When analyzing the charts, we need to pay attention to the following. We want to look for reference pivot points retested on several occasions in the chart. We analyze the last 12 months and in many cases also look at three or five years to identify points of interest.

[00:01:06.03] - Speaker 1
This especially in the case of major upward or downward movements and related pullbacks. We then look for major trend lines or channels. These represent interest levels that bring momentum to the stock. We pay close attention to maximum and minimum levels. We look at the highs and lows of the last 52 weeks and also at all time highs and lows.

[00:01:28.04] - Speaker 1
They represent important support and resistance levels. The price trend is dictated by the action of the participants. And when an important price level is retested, it leads to a reaction among the participants which causes the momentum of the stock. Then we look for areas with high volumes. We will see how to use the volume profile as a support and resistance tool.

[00:01:51.12] - Speaker 1
Finally, we monitor key moving averages, especially the 50 and 200 period. Now let's show you some screeners that we use in the selection of companies for our trades. Price touching major support for a long trade. Price touching major resistance for a short trade. Volume profile as a support and resistance tool.

[00:02:11.22] - Speaker 1
There is no real screener for this indicator. This is why we built it with our own quantitative model. Chart patterns like channels, triangles and other formations. In the chart, we want to analyze how market participants will react and identify potential entry points. These will become more relevant when we talk about breakouts.

[00:02:32.03] - Speaker 1
Price near highs and lows. We want to monitor when the price is 3 to 5% close to maximum and minimum levels. Let's start with the examples on TradingView. The first example is a long trade. By looking at a major support level.

[00:02:47.21] - Speaker 1
Here we can see the chart of Google going back in time. We can draw a support line connecting the levels. We can see the price retracing to the support level. The support level or zone is respected on multiple occasions in the Past we want to look for three or more touches of a support level to consider it important. In this case we would go long the stock.

[00:03:09.02] - Speaker 1
At the touch of the support. We can see the start of an uptrend from this support level. In this case, the support represents a level that attracts more buyers. Buyers who are interested in the stock, find the price level attracted and come into the market. The next example is a short trade at a major resistance level.

[00:03:28.20] - Speaker 1
Here we look at the Amazon stock. We can draw this resistance line that was previously a major support. Here we have a breakout with a gap to the downside. The price moves down but then retraces back towards the resistance level. Here we can look for a short trade on the resistance zone.

[00:03:46.29] - Speaker 1
We see the price moving back lower. As the bullish momentum was rejected. The price continues to move in a downward direction. The price then comes back towards the resistance level and provides a second potential entry. As we can see in this chart.

[00:04:02.13] - Speaker 1
At this level, more sellers are coming into the market and are looking to sell as they believe the price could have reached the top. This increased level of selling pressure forces the price to retrace. The next example looks at volume and how we can leverage it to define supply and demand zones. Volume is a great indicator of sentiment of an asset and represents the buying and selling activity of market participants. We use the volume profile indicator as a tool to help define where supply and demand could intersect.

[00:04:35.21] - Speaker 1
In this example, we look at the stock netflix and how the volume profile acts as a support. In the chart we can spot a swing low and a swing high. The price then retraces back. As we can see here, we are bullish on the stock and we want to find an area to enter our long position. We can use the fixed range volume profile indicator on trading view.

[00:04:58.25] - Speaker 1
We can draw it from the swing low to the swing high point. We can see that during the swing the largest volumes are within the green rectangle area. This volume support area becomes our potential entry zone as well as our stop loss level. We don't want the price to move below this area. In this case, we enter a long trade.

[00:05:18.18] - Speaker 1
When the price reaches the zone, the price stops and continues its uptrend movement giving us a strong momentum. We can use volume also for our short entries. In this case we want to see volume as a resistance signal. Here we have the Tesla stock in a downward trend. We can spot a swing high and a swing low.

[00:05:39.24] - Speaker 1
The price then starts to retrace back and move towards the upside. We are bearish on the stock and want to Find a potential entry for a short trade. We can draw our volume resistance area using the fixed range volume profile from the swing high to the swing low. We can see that during the swing the largest volumes are within the red rectangle area. This volume resistance area becomes our potential entry zone as well as our stop loss level.

[00:06:07.26] - Speaker 1
We don't want the price to move above this area. In this case, we enter a short trade. When the price reaches the zone, the price stops and continues its downtrend movement giving us a strong momentum. Now let's look at an example using highs and lows. Similar to support and resistance.

[00:06:25.16] - Speaker 1
Highs and lows are psychological levels that can move market participants and bring momentum to the stock. The market typically uses the 26 weeks or the 52 weeks as key price levels. In this example we will look at the Under Armor stock and how we can use highs and lows to define potential entries. We see that during 2020 the stock drops in a very bearish downtrend. In just a few weeks the stock drops from $21 to $7.

[00:06:56.06] - Speaker 1
We like to look at these types of movements especially on stocks that we are interested in holding for the long term. In this case we liked the stock and saw this massive move. This was driven by earnings reports and Covid. We now want to look at the long term trend of the stock and see that this price level was the level of 2011. This low price acts as a long term support.

[00:07:19.13] - Speaker 1
This was a signal for our long trade. We can see here a buy trade and a strong momentum over the following months. Let's look at another example using highs and lows. In this case we see a similar movement on the Wynn Resorts stock. The price reached the low levels of 2016 giving us a signal for a potential long entry.

[00:07:40.28] - Speaker 1
The next example is using support and resistance zones in conjunction with the confluence of trend lines. Lets look at this example. With the Visa stock the price is on an upward trend and we can draw our trend line. We are bullish on the stock and are looking for an efficient entry point. We can use the trend line in conjunction with support and resistance zones to confirm our trade.

[00:08:04.10] - Speaker 1
We can see a confluence of the price moving towards the trend line as well as the support zone. This can give us additional confirmation for our long entry. We like to use a confluence of indicators and price action to increase our chances of success. In this last example we can use the same principle and use moving averages in conjunction with support and resistance zone. In the last example we used the 200 period moving average on Apple.

[00:08:32.23] - Speaker 1
The price retraces to the average, which is also within a support zone, giving us a potential entry for a long trade. This concludes the lesson on how to create a trading strategy using support and resistance.