Identifying Support and Resistance Levels:
Support and Resistance levels can be identified by trend lines. Some traders believe in using pivot point calculations. The more frequently a support and resistance level is “tested” , the more significance given to that specific level.
If a price breaks past a support level, that support level often becomes a new resistance level, The opposite is true as well, if the price breaks a resistance level, it will frequently find support at that level in the future.
Using Support and Resistance Levels:
If a stock price is moving between support and resistance levels, then a basic trading strategy commonly used by traders, is to buy a stock at support and sell at resistance, then short a resistance and cover the short and support. When judging entry and exit investment timing using support and resistance levels it is important to choose a chart based on a price interval period that aligns with the trader’s strategy time frame.
Short term traders tend to use charts based on interval periods. Such as 1 minute with longer term traders using price charts based on hourly, daily, weekly and monthly interval periods. Typically traders use shorter term interval charts when making a final decisions on when to invest, such as levels based on 1 week of historical data with price plotted every 15 minutes. Support and Resistance levels can be used similarly for a wide variety of securities, from positions in equities, positions in commodity futures, foreign currency, options and virtually any other derivative.