Using Support And Resistance The Right Way

by | Mar 29, 2020 | Editorial | 0 comments

When it comes to picking entries and exits, many traders do not take into consideration support and resistance levels.

Unfortunately, that means they’ll enter at resistance and exit at support… which is just backward!

Do you know why else?

When you trade off support and resistance 

By simply identifying these key levels – it makes placing your entries and exits that much easier!

And I make sure I always use this little known strategy at Daily Deposits!

It’s so reliable that I want to show you exactly how to use support and resistance levels to time your trades with pinpoint accuracy.

Don’t believe it’s that easy? 

Daily Deposits returned approximately 110% in last week’s trading.

See for yourself exactly how mastering support and resistance levels can change the way you trade forever!


Daily Deposits


The strategy used at Daily Deposits is focused on intraday momentum.  This strategy anticipates the markets based on a custom set of pre-market analytics.  

These indicators are then combined with support and resistance levels that give you some of the most accurate trading signals out there!

Just by focusing on a few key indicators and pre-market support and resistance, you can have the opportunity to make triple-digit returns week after week!

In fact, even on these last two huge days higher, the system pinpointed perfect opportunities to make short trades.

Let’s take a look at exactly how I got my trades off to capture huge profits.


Pre Market Analysis


The first step in finding trades is searching the pre-market for clues as to what the market may do after the bell rings.

Daily Deposits is based around a set of momentum indicators that have been put to the test in one of the hardest to trade markets in history.  

The pre-market is broken into:

  1. The global overnight outlook
  2. Sectors for the US Markets
  3. Daily chart on SPY with Technical Analysis reviews

But those are 3 of 6 key premarket indicators I review in order to get a better understanding of what’s about to come.

In order to get the best understanding of what’s exactly going on, I use  6 pre-market indicators to get a jump on the markets.

And I always start with a global overview and analysis of the world markets!



Support and Resistance


Many traders believe that support and resistance are great for momentum trading…

But when these levels are tested they turn out to be excellent levels to place counter-trend trades.


Source: Thinkorswim


As you can see, this level was tested and the markets could not break out past this price.

And since so many traders were pushing for the markets to head higher, failure to break resistance will typically result in a quick reversal pattern.

This was seen after the false breakout with a sharp decline that continued all morning.

Here are some key points to remember about trading support and resistance levels.


Support And Resistance Are Zones


And even though these are called lines, in reality, they are zones.

Why is that?

Because they are psychological levels that traders look to buy and sell stock at.  

Another way to look at this is…. 

For example, a new TV was recently released and has the newest features in the market.  The store you usually shop at is selling the TV for $500, but unfortunately, it is sold out.  After looking around, the store next door is selling the same TV at $515.  

Would you not purchase this new TV you want because of the extra $15?

I doubt it.  

Chances are you would still buy the TV even though it is $15 extra…. 

And that is how support and resistance lines go too.  The area is more of a zone than it is a specific price level.  

In many cases, the markets will come close to the SR lines, or even overshoot this price at times.  

But the reversal will still usually occur in the opposite direction…And if you waited for the exact level, chances are you never entered this trade at all!

For example:


Source: Thinkorswim


Support and Resistance Levels Are Not Also Stop Levels


Many times, traders will place a trade at a resistance level and then a stop right above it.

But this is not a great idea… 

Here is an example of what happens when you place a stop right above the resistance level.


Source: Thinkorswim


Since resistance is a zone instead of a line, you don’t know exactly how far a stock will move against you.  

So where do you place your stop?

It’s actually best to look backward at prior resistance levels to find where to place your stop at.


Source: Thinkorswim


In this example, it’s best that a trader place their stop above the prior resistance level to allow your trade enough “room to breathe.”


There are 2 key things to pay attention to here:

  1. The risk vs reward is substantially in your favor.  In example, you can have $20 of profit and $4 of risk on your trade.
  2. Placing a stop-loss right above the second resistance line was the ideal price to remain in the trade.


Support And Resistance Can Switch Roles


Since Resistance levels are monitored by many traders in the markets, they become “hot zones” for severe price action.

This means that it’s important to make sure you are on the right side of the trade.  

And if you do find yourself on the wrong side, stops are usually close by to keep your account protected.

But there’s one thing a trader can do to take advantage of the wrong direction, and that’s to actually flip the direction of the trade.

This occurs when traders are “trapped” and are forced to cover their positions, pushing the prices higher and higher after the break of the resistance line.

Here’s an example of this happening.


Source: Thinkorswim


So it’s important to remember how to prevent being trapped when resistance breaks…

You can do two things to prevent being caught on the opposite side:

  1. Keep tighter stops above the resistance zone, but could be whipsawed out of a trade early
  2. Place stops above previous resistance zone to give you more room for a reversal


How I Use Support And Resistance To Trade The SPY


Once the momentum pre-market indicators are analyzed, you will want to look for support and resistance levels to place your trade.

Here’s what I traded earlier this week to show how I used these levels to execute the perfect trade.


Pre Market Analysis


By looking at the 5-minute chart before the market opens you are able to learn a lot about how the traders are thinking.  This analysis can give you a clear picture of what direction to trade the markets in the day ahead.


Source: Thinkorswim


Here are the key factors that we saw in the SPY’s trade for today.

  • The long term trend is bearish
  • The short term trend is bearish
  • Price sold off twice when extended above the upper Bollinger Bands
  • 10 MA < 20 MA

So before placing any trades, it is always best to analyze what these indicators are telling you about the stock.

From the analysis above, we are going to be looking to place a short trade in the SPY.

Note:  It’s always a good idea to layout where you believe the nearest stop levels are to place trades or stop prices.  Then once the markets are open you can use this information to help guide your trades.


Source: Thinkorswim


So looking at these levels we will want to look at going short the SPY at or near those two resistance levels as we watch the price action once the markets open.

Next…this leads me to the Trade of the Day.


The Trade Of Day


Now that pre-market momentum has been identified along with critical resistance levels in the SPY… the next step is to prepare for the trade ahead.

One approach to contract selection is to use weekly or monthly options.  It’s important to make sure that they are more than a few days until expiration but less than two weeks.  

Pro tip:  At-the-money or out-of-the-money options are always selected, based upon the price of the contracts.

Now let’s take a look at where to find the options contracts…


Source: Thinkorswim


And looking at the put contracts on the right, the trade I decided to take is….



Let’s take a look at the chart and see how this played out.

The Trade:

Here is a chart of the SPY’s… 

Even though this was a difficult market to trade, if a trader was to stick with it and be patient they would have had the setup they were looking for at the end of the day.  


Source: Thinkorswim


And this is why having perfectly placed stops in place is critical when trading fast-moving markets.

In this case, the stock was able to reverse at the first reverse zone and never made it to the stop at the second resistance level.  This means it was best to place your stop above the second resistance level. This would have made sure you are still in the trade to capitalize on the sell-off on those puts. 


Wrapping Up


The strategy that is used at Daily Deposits to find the Trade of Day is focused on intraday momentum.  

This strategy helps traders get in front of the markets by anticipating momentum based on a custom set of pre-market analytics.  

And when trading during periods of extremely high volatility – it’s always best to use stop levels that give your trade enough time and room to work.  

By focusing on a few key indicators and the pre-market trading session you have the opportunity to make over 100% returns last week alone!

Click here to join Daily Deposits!


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