How to Draw Support and Resistance Lines
In this blog I’ll show you guys how I chart out MAJOR support and resistance levels with both large caps and penny stocks and most importantly, how to apply those levels when you are day trading intraday or swing trading.
I’ll also be going over some quick and simple ways I use my indicators. So by the end of this blog, you’ll be able to draw support and resistance levels that actually matter on your stock charts and analyze the overall trend of the stock in the simplest way possible
1. Start with daily chart (the levels are the strongest)
Alright let’s dive right into it. When I draw out my levels for any stock, be it small cap penny stocks or mid cap large cap stocks. I always always start drawing on the daily chart first. The daily price and volume levels are the most significant.
I use the 13 EMA, 50 EMA and the 200 SMA, and of course, I have a volume indicator down there. On the volume indicator I have volume average. This volume average indicator is the most important indicator that I actually rely on.
I like to keep my charts very clean. I don’t use any fancy bollinger bands, ichimoku clouds, MACD, RSI etc etc. I find that the more indicators you have, the more time it takes for you to put the pieces together. In trading, I stick to KISS, keep it simple, stupid. Once the moving averages and volume average indicators are set up it’s time to draw out the lines. So use the horizontal drawing tool you have in whichever broker platform you are using. I always start with the daily chart, and draw the most obvious highs and lows.
2. Adjust lines to land on major volume breakouts and breakdowns
After we’ve roughly drawn out the levels, we want to go in and adjust each horizontal price level. The rule of thumb is this, you want each level to touch at least 3 points to be considered a line worth watching. After adjustment, there's one more step I do on a daily basis. On top of having the major tops and bottoms drawn out, you want to make sure the lines reflect major breakouts and breakdowns with strong volume. This is where the volume indicator down at the bottom comes in.
The volume bars reflect the amount of shares sold or bought on that day. So if you see a volume bar breaking above the average, which is why I use this volume indicator, it means the buying or selling level that day is especially significant.
Once you’re done, a very quick and easy way to double check whether your support and resistance lines make sense, is to flip the daily chart to the weekly. The chart should still look very clean. At this point, I want to double check that the lines land on major volume breakouts. So you can add or move them here if you want to. When I’m swing trading for more than 2 days, I use the levels especially on the weekly chart.
3. Draw lines on visual daily gaps
Next go to drawing tools, fibonacci extensions. Draw from the start of the trend to the end of the trend and there you go. This is pretty much the only time I use fibonacci to draw out support and resistance. Only when a stock is trading at new highs and I don't have other daily candle levels to look at. You can see during this that the fib levels correspond to intraday. These are all in hindsight of course. This is what the algos use and most other traders and funds use as well.
Besides using daily chart levels and Fib extensions to draw out support and resistance lines for intraday trading, the most important price levels I care about intraday, are the premarket high and premarket low.
Now when this premarket low breakdown is quickly recovered after a breakdown. That's a sign of a reversal. I stopped the rest of the entry. Some people would just flip over to go long. That would work in this case, but sometimes the premarket high holds up and the stock just sells off back down again as per the original plan. Again, patience is key, I like to wait for premarket high breaks with strong volume as a confirmation that this stock is indeed long.
You definitely don’t need to pay a trading service for guidance, but I personally do and I use this chat room as a scanner to find the set ups with the most range.
4. Adjust each stock price level to touch at least 3 areas on the chart.
This is the method I use to draw support and resistance lines on small cap penny stocks, mid caps and large caps, whether they are in a daily trend or all time highs.
Again, always start drawing on the daily chart and mark out the tops and bottoms that stand out, because that's what the majority of the people use. The price levels should touch at least 3 reference points on the daily chart.
5. Double check the lines on the weekly chart (especially if you were swing trading for more than 2 days)
The levels should be reflected on the weekly chart as well as supported by above average trading volume down here. Make sure to note the gap up and gap down levels and use fib extensions to draw out the support and resistance lines on a stock that’s trading near all time highs.
When trading intraday, besides using the levels drawn from daily and weekly, use premarket high and low prices as indicators to go long or short.
This method of charting and setting up makes things simple and very clean to read. I don’t use any more indicators besides those I mentioned in this blog. That way I can focus on price action, trader psychology, and how the candles are reacting to each support and resistance levels, instead of spending the time to check whether all the bollinger bands, RSI and MACD line up.
Because guess what, most indicators are lagging after people have made their decision to buy or sell. If you rely on them you’ll always be one or two steps behind. This is my quick and easy charting. Thanks for reading!
