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I won’t dwell that much on the etymological, wikipedia-esque or investopedia-esque description of support and resistance, per se, in this article. Just to give you a concise idea on what support and resistance levels are, let me define them for you.
Support is the price level where it is psychologically believed that the interest to buy is strong enough to stop investors from selling further. On the other hand, resistance is the price level where it is psychologically believed that the interest to sell is strong enough to stop investors from buying further. Don’t worry because I will give you an actual and a graphical representation of support and resistance levels below.
In a simpler discussion, if the stock’s price declines each time it hits a certain price level, you can consider that as the resistance level. If the same way, if the stock’s price rebounds every time it hits a certain price level, you can consider that as the support level.
By the way, please visit www.stocksignals.ph and sign up there. I’m going to move all Stock Signals-related stuff to that site soon. Visit it. Bookmark it. Register yourself so you’ll be notified once it’s up-and-running.
Now, let’s go back to my original intent of showing my 3-step rule when identifying and plotting the resistance levels of a stock. Keep in mind that every technical analyst has his or her own style when plotting the support and resistance levels of a stock. So don’t take this article as though I’m implying that this is the only way, okay? I follow a multi-timeframe approach when plotting support and resistance levels. Let me demonstrate that to you by using COSCO’s chart.
Step 1: Plot the Monthly Chart. Draw the support and resistance level.
The black horizontal lines are the support and resistance levels I’ve added after plotting the Monthly Chart.
Step 2: Plot the Weekly Chart. Draw the support and resistance level.
The orange horizontal lines are the support and resistance levels I’ve added after plotting the Weekly Chart.
Step 3: Plot the Daily Chart. Draw the support and resistance level.
The purple horizontal lines are the support and resistance levels I’ve added after plotting the Daily Chart.
There you go! Now you have a multi-timeframe approach when plotting the support and resistance levels of a stock.
By the way, it’s fine even if you’ll use black horizontal lines all throughout. I used three different colors so you can identify the new lines I plotted for each timeframe. This approach encourages me to review the historical behavior of the stock on a monthly and weekly basis, too.
I suggest you study how to plot support and resistance levels if you’re a beginner. Never trade a stock unless and until you know how to plot support and resistance levels. I’ve already spoken with thousands of people who are trading and investing in the stock market. Many of them, especially those who have lost lots of money trading, do not know how to plot support and resistance levels.
The support and resistance levels of a stock are a sneak preview of what traders were thinking. If you see that the stock’s price made several unsuccessful attempts to break a resistance level in the past, that is already a clue where you should put your target selling price. In the same way, if you see that the stock’s price bounced every time it hits a certain support level each time it hits that level, that should give you an idea where to buy.
If you’ll jump right away into buying stocks immediately after getting your online stockbroker’s account approved, then, you’re just setting yourself up for a frustrating experience trading in the Philippine stock market. Do yourself a favor by going through the learning process that you need to pass.