hey what's going on everyone thanks for checking out this video my name is Travis from master the
market and in this video we're going to talk about support and resistance we're going to cover the
basics of support and resistance as well as some tips that a lot of new traders don't really know
about support and resistance that a lot of times lead them to use them the entirely wrong way
and take a lot of unnecessary losses that hopefully after watching this video you are going
to be able to avoid making so with that being said let's go ahead and start with the basics what is
support support is essentially a price level where a stock historically has a difficult time breaking
below due to stronger demand than there is supply now simply put the stock market moves really
because of supply and demand if there's more demand meaning that there are more buyers at a
certain price than there is supply or sellers then all of that demand and all of that buying is going
to push the price of the stock higher from that certain price level and really that's exactly what
happens at a level of support the support levels start to form and you can see that there often
ends up being a very clear level of support as the price starts to bounce from the exact same area
over and over and over and we can look at that as an opportunity to buy low
at that support level because again it's having a difficult time breaking below and as the price
of the stock then bounces off of that level of support we can then go ahead and sell high making
a profit on that trade and really that is the entire goal of trading in the stock market whether
that's day trading swing trading or even long term investing we want to buy low and sell high and
support simply offers us an opportunity in many cases to buy low before being able to sell high
so if we take this example here with amd this is a great opportunity to buy low
at this 74 dollar price level once we start to see this level of support forming as the price bounces
over it multiple times we can buy low in this case at about 75 dollars as the price bounces up we
would have an opportunity to sell at 85 dollars making about 10 dollars per share on that trade
then you can see the stock pulls back to that support level yet again
so we can buy again at that support level being able to sell higher later on
and once again it does pull all the way back down to support so we can buy low and again sell high
repeating this process over and over and over as long as that level of support does stay intact
so you can see already how this really simple method of technical analysis
by looking for these levels of support is a really great way to take a lot of the guessing
out of when you should buy a stock and of course is going to allow you to start buying low based
on strategy and based on the chart itself now on the other side of the spectrum from support
we have what is pretty much the polar opposite and that's going to be resistance resistance is
simply a price level where a stock historically has a difficult time breaking above due to this
time stronger supply than there is demand so there's more selling and there's more supply
at this price level which is going to inevitably drive the price down from that price level
offering us an opportunity to sell high before the price pulls back down
so we see these price levels forming we see the stock failing to break above this certain price
over and over and over you can then determine of course that that is a level of resistance
and if you are currently in a position uh so you bought earlier on and you're looking for
an opportunity to then sell high before the stock reverses to the downside a level of resistance is
a great way to do that and additionally another way to take advantage of these resistance levels
is to actually go ahead and short sell at resistance for those of you who may
not know short selling simply allows you to sell high first so you technically borrow
shares from your broker to sell high when you think the price of a stock is going to go down
and then you can later on buy back those shares at a lower cost returning them to your broker
and profiting the difference between where you bought and sold so you still want to buy low
and sell high but with short selling you simply sell high first and then ideally buy low later
on again these resistance levels can offer us a great opportunity to sell high first and then
actually profit from that reversal to the downside that often does happen after resistance is formed
so to show you a quick example of this in real life we have the chart for dhr and we can see that
there are a few opportunities here to actually sell into this resistance level that is starting
to form just below 250 per share so had you been in a position in dhr prior to this resistance
forming i mean you're looking for an opportunity to sell and lock in your profits on the investment
once this resistance level starts to form um and you start to see the price is struggling to
break above 250 per share on multiple different occurrences that's going to tell you that some
resistance is forming and it's going to be a good idea to lock in profits on that trade
before the stock does start to pull back down so essentially the really nice thing about resistance
is it takes a lot of the guessing out of when you should sell your stocks
which is something that a lot of new traders struggle with because they often
end up getting greedy and they often hold on to stocks for much longer than they should
which leads them to watch their winning trades turn into losing trades so by selling at these
resistance levels you're hopefully going to be able to prevent yourself from doing just that
okay so with all of that being said this is where things with support and resistance kind of start
to get a little interesting because most new traders do actually know what support and
resistance are they know most of what we talked about in the previous few minutes but they don't
necessarily know some of the things that we're going to talk about here in the following few
minutes that have to do with stock breakouts and stock breakdowns so essentially what a breakout
is is going to be a move above a defined level of resistance and a breakdown is just going to
be a move below a defined level of support so to take breakouts and breakdowns a step further
once a stock actually breaks below support that pass level of support can then become a level
of resistance and vice versa is also true a stock that is breaking out above resistance
can then pull back to that past resistance level which can now become a level of support
so to kind of help you visualize what this is going to look like if we take the diagram here
down at the bottom left you can see that initially we have a level of support that forms on the stock
but eventually the price of the stock does end up breaking down below that support level
and as it bounces back up you can see that that pass support is now becoming a level of resistance
and if we were to flip things around and we had resistance first once that stock breaks out
above that resistance it can pull back and that pass resistance level can then become a level of
support so this is very important to keep in mind because a lot of people will see that a stock is
breaking down below support or breaking out above resistance and they simply remove those lines from
their charts because they no longer think that they're very valuable but even though the price
has temporarily broken above or below them they can of course still be very valuable price levels
in the future now with that being said it would be wrong to talk about breakouts and breakdowns
without also talking about false breakouts and false breakdowns which are short-term
temporary breaks above resistance or below support before a reversal in the opposite direction
these false breakouts and false breakdowns are really just fake outs to mislead inexperienced
traders to pay and excel at the bottom of a move or panic by at the top of a move so if you're a
new trader and you've ever seen a stock breaking out above resistance and you decide that you're
going to buy into this momentum and hope that it breaks out and continues to run to the upside
but what happens a lot of times is it comes immediately back down below that resistance level
and actually ends up going significantly lower in that case what happened is you simply bought
into a false breakout and unfortunately this is something that causes a lot of new traders
to lose a lot of money and here's an example of what this often looks like in real life
we see that there is a level of support forming at about 48 or 49 dollars per share here
on amd stock repeatedly bounces off of that price level and on this particular day the stock briefly
breaks down below that price level most likely faking out a lot of new and inexperienced traders
before bouncing back up to the upside and actually running up and breaking to new highs
so what happens is a lot of people see this support level they think that if the stock breaks
down below support it's going to continue to go lower and lower so they start to panic a bit and
they sell their shares at the very bottom of this move before it bounces back up and goes higher
and although it is very good to manage your risk and cut losses especially if a stock is starting
to show some bearish signs such as breaking down below support but it's obviously never
a good thing to cut losses on a false breakdown by selling at the bottom of the move so that's
kind of where proper risk management is going to come into play if you happen to have a stop
loss which is an order that is placed to automatically cut your losses on a trade
if a stock reaches a certain price if you have one of those placed below a level of support
because you know that a breakdown below support is a bearish signal and you want to sell your shares
and cut your losses if that does happen it's very important to give your stop-loss some wiggle room
below that level of support in order to prevent yourself from getting stopped out on a false
breakdown so for example if there was a stock that had a support level at ten dollars per share
it's going to be a bad idea to place a stop loss at 9.99 or even 9.98 because in that case
you're not giving yourself any wiggle room for a false breakdown and you're immediately going
to be stopped out if the stock breaks down below that 10 support so my recommendation
is to give yourself anywhere from one percent to sometimes all the way up to 10 below support
and really this is going to depend on how volatile the stock is that you're trading
and of course your own personal risk tolerance now as far as volatility goes
um if you're trading a stock that trades in very small ranges and there's not a ton of volatility
uh you can often get away with putting a stop loss anywhere from one percent to three percent
below that support level uh but if you're trading penny stocks and you're trading these low float
pump and dump stocks that have a lot of volatility and they trade in very big ranges on a daily basis
in my opinion you probably want your stop loss to be anywhere from five to ten percent
below a level of support to avoid yourself from getting stopped out on these false breakdowns
at the end of the day you have to keep in mind that everybody else that's looking at the chart
is also going to be seeing the same support and resistance levels and the entire goal of other
traders and other hedge funds and institutions is to see you lose money in order for them to make
money so if they see the same support level that you're looking at and they know that
there's a good chance a lot of retail traders like you and i are going to have a stop-loss
place below that support level a lot of times what these traders with a ton of money will do
is temporarily drive the price of the stock down below that level of support
to fake out inexperienced traders before the stock bounces back up and goes higher so while it is a
great idea to have risk management in place and to cut your losses on trade you do still want to
give yourself some room below support to prevent yourself from being manipulated out of your money
alright so that's going to be a wrap for this video i hope you enjoyed and learned
something new about support and resistance if you did please make sure to give the video a
like and subscribe to the channel so you don't miss out on future videos
and future video lessons and of course if you're looking for more information about day trading
swing trading and even long-term investing all of that can be found at my website master the market
which is going to be the first link down below in the description but anyway thanks again for
watching i hope you enjoyed and good luck with your trading i'll see you in the next video
you