Knowing the key price levels at which other traders will be willing to buy or sell is always helpful. You can not be 100 % right about a price level, but the majority of the time support and resistance levels are very helpful in day trading. In your trading platform, you can add daily pivot points and look for support and resistance levels.
In the below image example, there are three support levels and three resistance levels. In the middle of support 1 and resistance 1, there is a pivot point.
The daily pivot, support, and resistance levels are calculated using OHLC(open, high, low, close) price data of the previous day. There are several other ways of calculating support and resistance levels, but a calculation using OHLC data is the most basic type.
Use resistance levels to sell
R1, R2 and R3 levels can be used as a confirmation level for selling setups. Always look to sell at higher price levels. If financial security is trading near resistance levels, chances of other traders willing to sell ag these resistance levels are higher.
Use support levels to buy
S1, S2, and S3 levels are crucial support levels at which traders look to buy financial security in day trading. It’s not always necessary that exactly at these support levels buying will happen. The idea is to look for buying opportunities instead of selling at these levels.
How to use Support and resistance levels for profit booking?
When you are clear about the direction of the trading day and see good momentum in the market, use support3 and resistance 3 as a price level for profit booking. Its always better to book profits a little before these price levels are touched. For example, if your support level 3 is at 1000 and you have shorted a stock at 1030, you can book your target 5 points ahead of S3 at 1005 and vice versa for buying.
Support and resistance levels should be combined with your day trading strategies and should not be used as an indicator for buying and selling entry. Our next lesson, Chapter 8- 5 min and 15 in day trading strategy, teaches you how to combine support and resistance levels efficiently with a day trading strategy. Find out our two core simple and effective strategies we use for day trading in the next chapter.