Determining Support And Resistance Levels.

Determining support and resistance levels are somewhat different for the day trader than the position trader. This is because support and resistance levels for the day trader must be closer to the current market price that they are for the long term or position trader. Markets can only drop so far in one day, and as such the determination of support and resistance levels by the day trader must be realistic in terms of what can be expected – however this does mean that day traders must be willing to use technical support and resistance levels to establish their positions.

The following rules may appear very simple, but they are very effective at isolating support and resistance levels and can be applied in any market:

1. Follow a 3-day simple moving average of the lows, and a 3-day moving average of the highs.

2. Take the 3-day moving average of the lows to define your support level, and the 3-day moving average of the highs to define your resistance level.

3. Draw a line at the support of the lows, if the trade has made a 3-day high in say the last 3 days (you can use four or five days, depending on your trading method) This means that you will only draw in the 3-day moving average of the highs if the stock has made a 3-day low in the last three days – this means that you only want to sell when the short term is down.

This is a very simple method of trading stocks and commodities on a daily basis, and if calculated correctly they will work. Combine this with the insight that candlestick charts give you and you can create a system that works for you. Let me give you a example:














The above chart for Halliburton (HAL)[HAL] shows a large trading range between Dec-99 and Mar-00. Support was established with the October low around 33. In December, the stock returned to support in the mid-thirties and formed a low around 34. Finally, in February the stock again returned to the support scene and formed a low around 33 1/2.

After each bounce off support, the stock traded all the way up to resistance. Resistance was first established by the September support break at 42.5. After a support level is broken, it can turn into a resistance level. From the October lows, the stock advanced to the new support-turned-resistance level around 42.5. When the stock failed to advance past 42.5, the resistance level was confirmed. The stock subsequently traded up to 42.5 two more times after that and failed to surpass resistance both times.