Support and Resistance Trading

This post I would like to share my insights on how to trade stocks using support and resistance rule. Before we can trade using this rule, let me define "support" and "resistance" first:

"Support"- is when the price is low and at this point there are more buyers than sellers. This is the price at which buying volume will start to pick up because most of the traders agree that the level is low.

"Resistance"- is when the price is high and at this point there are more sellers than buyers. This is the price at which selling volume will start to pick up because most of the traders agree that this level is high.

Trading with support and resistance does not need mathematics but more of a common sense. This is my most favorite method in trading because you cannot go wrong here and is a very simple but reliable method. The only thing that will go wrong is your analysis. But support and resistance of prices will always be there, you just missed to spot it correctly.

Also you have to take note the behavior of support and resistance. This is because:

Rule #1: Once the support level is breached, which means prices continue to go downward, that support level will now become the new resistance level.


Rule #2: Once the resistance level is breached, which means prices continue to go upward, that resistance level will now become the new support level.

Lets analyze these two rules using a sample chart below:




The graph is a typical long term trading. It is because the x-axis are incremented with almost per year basis. These stock charts are very important because just looking at the graphs without the need of complex mathematical analysis, you can identify the areas of "support" and "resistance"

Say the time is June 2002. The price reached it lowest and we need to test the areas of support and resistance. We do not trade right away. This is what the analysis should be:

On August 2001, there is a price at 29.64 then it goes up to around 41.76. We can say 29.64 is the support 1 and 41.76 is the resistance 1. After that, it goes down since at the point of resistance there are more sellers than buyers until it reaches the point of 29.64 again. We might thought this is still the support, but it may be not this time. We need to test it first. At 29.64, it did not stay there for so long and came down. The test of support fails.So 29.64 is now the new resistance and we call it resistance 2. But we do not have data of the new support, we wait. Until now on June 2002, it reaches the lowest point at 20.55. Now traders think this price is now so low, so they start buying. And what happens?

It hesitates on that area for some time. This is the new support which we call support 2.This is a good time to trade "long". Trading long means, buying at a low price and selling it at a high price.

It also means buying at "support" areas and selling at "resistance" areas. When we buy at for example 23.58, and set the stop to 20.55. This is a good trading. Then what happens next is when it reaches again 29.64, we will sell it because it is the area of resistance. After that, we get some profits.

Although no trading system is perfect but identifying support and resistance areas needs practice. A good tip is to identify areas of "hesitation". This is the area where a violation of support and resistance will most likely to occur. Say we trade short at 29.64 and would like to buy it somewhere at 23.58. But 25.09 became areas of hesitation and you may consider buying at that point to avoid losses.

You can practice support and resistance areas by paper trading and looking at the current stock charts, monitor how accurate you can pinpoint support and resistance areas with analysis just like above, then you will be a great trader.:)
Other great info in support and resistance trading you visit here: Support and Resistance Trading

Stock Trading 101 : Basic Definitions

So you wanna be a stock trader? Below are the important terms and definitions you need to know when it comes to stock trading online:

a. Stock- this is company that is trading on exchanges. There are several US stock market exchange such as New York stock exchange, Chicago mercantile exchange, and others.Stock are commonly represented by symbols. For example GOOG, is a stock symbol for Google.com.

b. Quote- this is the price of the stock at a certain date. It is changing and it fluctuates depends on the market conditions.

c. Bear - this is falling trend of stock market prices. In stock trading, I advised not to trade with a bear market because it is very risky and it best to trade only when the market is bullish. However in futures trading, one can profit for both bearish and bullish markets.

d. Bull - this is an increasing trend of stock market prices. In stock trading, this signifies a growth of stock value, also fundamentalist view this as a sign of company success. Like Google before it starts with a very cheap stock price, but in 2008, Google is trading around 433 dollars. Investors buying shares at at those very low prices before where Google is almost unknown to everyone are now very rich today if they trade Google stocks.

e. Portfolio- this is list of stocks you would like to trade. The summation of all profits of all stocks results to overall portfolio profit. Or the summation of all losses of all stocks results to overall portfolio losses.

f.Stock Broker- this is someone representing your trading account, and is responsible for providing you advices to make your trading successful, or is someone in between YOU as a trader and the EXCHANGE.

g. Support- the price level at which it starts to happen when there are many buyers than sellers.



h. Resistance- the price level at which it starts to happen when there are now many sellers than buyers.

i. Moving average- the average of the prices in an "x" number of days. So a 200 day moving average is the average of past 200 days.

h. Trending market- it is either be an increasing (bullish) trend or a decreasing (bearish) trend.

i. Trading range- not in trending markets.

j. Stop loss- this is the price below your entry price that you would like to quit to avoid losing further.

k. Entry price- this is the price you decide to enter trading based on your trading plan.

l. Exit price- this is the price at which you leave trading to get profits based on your trading plan.

m. Trading plan- a complete set of trading rules regarding when to entry, exit and managing your trading.

n. Money management- a plan on how you will deal with losses while maintaining a profitable trading positions.

o. Expectancy- a measurement of your trading system profitability. If it is positive, your system produces profit,otherwise you will lose money when you continue trading with negative expectancy.

Mathematically it is expressed as: Expectancy = (Probability of Win * Average Win) + (Probability of Loss * Average Loss)

p. %Win- the probability of winning, number of winning trade over total trading.

q. %Loss- the probability of losing, number of losing trade over total trading.

r. Average win- how much is your average win in dollars per winning trade.

s. Average loss- how much is your average loss in dollars per losing trade.

t. Technical analysis- a method that all trading decisions are solely based on technical analysis data regarding stocks and could be represented by any methods such as moving average, support-resistance analysis or trending analysis.

u. Fundamental analysis- a method that all trading decisions are solely based on the performance of the company such as their marketability, how the people in the company are performing, the quality of their products, looking at how the company are earning at the moment and their future plans.

v. Shares- quantity of stocks traded. This is the measurement of how much you have traded in stocks. For example, I trade 500 shares of xyz company stocks at 2 dollars per share. The total value that I bought is around 500 x 2 = 1000 dollars worth of stocks.

w. Long- synonymous term for being "bullish" or increasing stock market value. In futures trading, it means buying at a low price and selling at higher index value.

x. Short- means sell first and buying later.

How to do paper trading in stocks?

Paper trading is the most effective training method for a trader. If implemented with full discipline, this produces same effect as trial trading but no money involved.

Some may say, paper trading biases performance of money involved. It might be true but if implemented with full discipline, paper trading should produce the same effects as real trading.

Paper trading enables you to test your portfolio strategy before going into real trading.

Paper trading as the name suggest, requires you to trade either in daily, weekly or monthly trading without real involved but only tracking the prices of the stocks. Paper trading should have a complete trading strategy,so this means:

a. Should have an entry strategy- when to enter buying stocks.
b. Should have an exit strategy- when to leave or sell the stocks.
c. Should have a money management strategy- how much profit would like to made, how much losses are you willing to accept, or how much is your stop?
d. Incorporates trading commission to simulate real events.

Paper trading can be done in MS Excel, I have tried it before and it works. So basically before you start paper trading, make sure to comply below:

a. List of stocks you want to track and include in your portfolio. In this step you need some tools to completely track the stocks. This is very important because the quality of your stocks affects the profitability of your portfolio.

b. When trading online, have a portfolio online. Yahoo finance offers a free portfolio where you can manage your stocks.

c. Decide on your trading plan. See above for my advices on having a complete trading strategy.

d. After deciding on the trading plan. List all your stocks in a complete spreadsheet and track it at one glance, monitor and update it according to your stock trading plan.

e. Trade- enter and sell stocks in time according to your trading plan.

f. Evaluate your trading plan and your portfolio- the most recommended is after you have reached at least 100 trading points per stock in your portfolio. Then you can assess one by one performance. This is the time to stop trading for a while and analyze the results of your paper trading.

g. Correct or continue your trading plan if necessary, have one last test to replicate the results before you go to real trading.


Paper trading in order to be successful is to treat it like a real trading. One of the most important things to track when you trade portfolio is the STOCK PORTFOLIO EQUITY. And the best way to track is to plot it. See sample equity curve below:




As shown in the equity curve, I have 5 trading events and all of it are wins. It is why there is a growth in my equity. In short, I am earning money with this paper trading.

But do not judge your paper trading performance with 5 trading events, typical winning scenarios at stock is only at 50% so this means that if you have 100 trading scenarios, only 50 of it will result to winning. Without money management strategy, you will never earn money from trading.

Basics of Stock Trading Online

(Trending chart courtesy of Wikipedia)

As a novice stock trader, I came to know these most important skills when it comes to making money with stocks:

a. Discipline
b. Risk taker
c. Decision based on facts not inferences
d. Capital
e. Patience
f. MONEY MANAGEMENT

Nothing more, nothing less. I do admit I work once for a professional stock/futures trader giving him advices on trading that makes him very successful. Stock trading might be one of your most profitable hobbies or it could become your worst enemy.

I will give my personal experiences on the above important skills:

a. Discipline- stock trading needs an solid, consistent, objective and exactly clear trading system or method. This method is the result of your studies in trading of which you will find feasible. Example of this are based on support and resistances of stocks, moving average method or any technical methods. Discipline results from following this with fullest faith.

Fullest faith? No way, but only by following your trading method will you find success. Trading needs consistence in method. Say you go buy stock at 100 dollars, you want to sell it when it reaches 200 dollars. Your stop is 95 dollars.

Say we are doing intra-week trading here, next week we find stock falls down at 98 dollars. You feel nervous, but your stop still at 95 dollars. Next week again, it falls down to 96 dollars, you will disappointed and immediately sell the stock to prevent losing money further.

But next week, stocks climb high to 110 dollars, then you missed the boat!

This is a typical stock trading scenario, where many traders commit suicide, gets disappointed and loses a lot of money. It is because they lack DISCIPLINE in trading. Do not ever let your emotions govern your trading.


Online stock trading is a place for professionals not for emotional people.

b. Risk Taker - it takes money to make money right? So you have to take risk in trading stocks. There is no such thing as 100% win in trading. All professional traders are also experienced losers. But they manage risk carefully with money management. To be a successful risk taker, you have to quantify:

- How much risk am I comfortable of letting into?
- How much money I want to lose?
- Is that lost money will able me to trade for a long time?

Risk taker quantify risk. So this means that if I enter a trade, I have to leave if i lose this "x" amount of dollars, that's it. Then stick to it, apply discipline. Also, risk taker are comfortable with their losses, it maybe stupid to hear but professional traders are used to trading losses. They are just comfortable with it. It depends on your risk personality profile. Some do not get alarmed when they lost 100 dollars but for some 100 dollars is a big losses and gets upset. So the best advice: Before you enter a trade, quantify your loses depending on your money management strategy. Or in other words,how much are you willing to accept to lose.

c.Decision based on facts not inferences- let me tell you that "Insider Tips" is useless, if you do not have any measurement of its success. And do it yourself do not let them provide you with false data. This is not to say all insider tips are bad, but I would like to say that it depends on the investor and he should be the one doing the research to know if it is really successful.All must be based on facts , and do not trade with emotions or hunch. I am sure, you will only last one week in trading and quit.

d.Capital - Capital is the 1st step in trading and you cannot trade without a capital. And your stop loss or how much you can afford to lose depends on your capital to make sense. Typical stock trading capital is around 30,000 dollars or more. The higher the capital the better, you can have a wide tolerance in stops. But be careful, only money management can make you win, not your capital.

e.Patience- we all greed for money, but wealth is not a one week activity but takes time to build it. It is why when you have a stock trading portfolio, always think of it as a long term investment. Do not immediately sell stocks if it is not part of your trading plan. Patience is important in trading, it gives you less cost in commission by not over trading.

f. MONEY MANAGEMENT- the last but not the least, but it is the most important aspect in trading. Money management is a skill that enables you to control your loses and maximizes your winning position. It is a must for every investor.