- 2 years, 8 months ago adminKeymaster
Day Trading: Working with past support levels
Do you use strategies with intra-day trading based on past support levels? If not, you should pay attention to them, to understand whether they can improve the effectiveness of your trade. Of course, no single method of trading can guarantee both a short-term positive result and a constant growth of the trading account .
In order for the trading plan to be complete, it must include elements such as risk management, the choice of the correct size of positions, the psychological aspects of trade, and others. Each component needs to be practiced, trying to bring it to perfection. From any of them can depend both on the result in a separate transaction, and the result of a whole year of work.
Finding good entry points
Let’s look at one of the ways to find good entry points for doing long trades. Although the material in this article is designed for intraday trading using previous support levels, the same methods can be used for swing trading over longer time periods.
Look at Figure 1. In the morning, there was a big move from Low near the price of $ 2.60, which lasted until about 10:30, after which the stock rolled back a little.
Figure 1. Morning pulse followed by pullback
It could be a good deal, but we all know that such a big movement can often be found only after it has already happened. You probably also faced such situations and sometimes succumbed to the temptation to make a purchase when the traffic is already in full swing, in our example – around 10:30.
Let’s say that we found this chart after the close of the trading session, when we selected shares, which we will monitor on the following day. At the same time, we could put on the schedule the lines of support and resistance, which are obvious here. Sometimes such price levels are not so obvious. In this case, you just need to add this stock to the checklist to see what will happen over the next one or two days. Often it also happens that clear levels of support and resistance become visible after the first day of the big movement.
Returning to the above graph, we can draw a resistance line through the High from above, and from below a support line where most of the turns took place. Such reversals show that near this price level more buyers enter the game than sellers, and therefore this is a good level of support, which should be watched.
Now let’s look at how the price behaved the next day. Take a look at Figure 2:
Figure 2. Unsuccessful attempt of breakdown
Here you can see that at the beginning of the trading session, the price made two attempts to break up, and both times – unsuccessfully.Since we put this stock on our watch list on the previous day and plotted intraday support and resistance levels, we knew in advance that the zone around 3.60 $ -3.70 $ represents a strong resistance.
This could be our first potential opportunity for trading: you can open a deal in short at the last level of resistance. However, this is not the subject of this article; here we will focus on trading from past support levels.
After a failed breakdown, the stock went down, dropping by about 10%. This is a big move. It is large enough that many traders, looking at this chart and seeing such a fall, wanted to open the deal in short after the movement occurred.
Now let’s look at Figure 3, where the two days are presented together:
Figure 3. Developing the level of support
Since we previously applied support and resistance levels to the previous day’s chart, we knew that the $ 3.20 area is the key support level. Instead of shortening the share near this level, as many day traders would do, looking at the chart of the current day, we have the opportunity to enter into a long-term transaction with a high probability of success, thanks to the fact that our strategy is based on previous levels of support.
Since on the previous day the price has repeatedly unfolded from this level, then with high probability we can expect that it will do the same and this time. ATTENTION: This does not always happen. The price can fall from this level even lower. To protect yourself, you should just use additional trading signals , proven methods of choosing the position size and risk management, in particular, to place a stop order below the previous support level. Better to be safe than sorry.
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