As a day trader, you should know the most important support and resistance levels.
Have you ever entered a trade, just to watch the market move immediately against you?
Did you feel like there was some unseen wall, or some sort of “magic” price level that everyone knew about except for you?
In reality there’s little magic involved, and what you do with support and resistance levels is ultimately more important that the levels themselves. But there are key price levels that traders should watch if you’re serious about day trading.
In this article I’ll share the 5 most important support and resistance levels for day trading.
What Is Support And Resistance?
Before introducing the support and resistance levels I use, let’s first define support and resistance and clarify why these levels are important when trading.
Resistance is a price level that attracts sellers, potentially preventing an uptrend from continuing once hit.
Support is a price level that attracts buyers, potentially preventing a downtrend from continuing once hit.
Simply put, support and resistance can act as barriers in the market. As a trader, I want to ensure that profits can be taken before encountering support and resistance, or I will look for a strong break through support or resistance before expecting a trend to continue. Even if a strong trend encounters support or resistance and continues to trend, you’ll often see a pause in direction and some choppy trading before the price level is broken.
The Most Important Support And Resistance Levels For Day Trading
What are Pivot Points?
Pivot Points were once considered “floor pivots” and used by floor traders at major exchanges. These levels continue to be used by many day traders and are very popular in the trading community.
I often refer to Pivot Points as “advanced support and resistance” levels since they require a mathematical calculation to identify these price points. You could do this calculation manually, but it really isn’t necessary since many charting packages include pivot points these days. If you don’t have Pivot Points available with your charting platform, please contact us and we’ll be happy to recommend some charting software packages to get pivots and the chart settings we use for day trading.
If you’re interested in calculating pivots on your own, here are the calculations for a standard 5 pivot point system:
R2 = Pivot Point + (High of Previous Day – Low of Previous Day)
R1 = 2 x Pivot Point – Low of Previous Day
Pivot Point = (High of Previous Day + Low of Previous Day + Close of Previous Day)/3
S1 = 2 x Pivot Point – High of Previous Day
S2 = Pivot Point – (High of Previous Day – Low of Previous Day)
Note that the “Pivot Point” calculation is simply an average of the prior session’s High, Low, and Close. This serves as an “average price” of the previous session and is very important for many traders. Although the standard Pivot Point calculation calculates five (5) price points, we actually only focus on three (3) of these Pivot Points when day trading: R2, Pivot Point, and S2.
Including the Prior Session’s High and Low
Now you might recall that I use a combination of Pivot Points, and the prior session’s trading range as support and resistance levels for my trading. In our experience the prior session’s range (previous day’s high and low specifically), is equally as important as pivot points when day trading. Since the prior session’s high and low are typically close to the R1 and S1 pivots, we remove the S1 and S2 pivots from our charts. This is because in our experience the previous day’s high and low are usually more significant.
In the chart above, we see a chart of the E-mini S&P 500 and the 5 key support and resistance levels that we’ve discussed:
- R2 Pivot Point
- Previous Day’s High
- Pivot Point
- Previous Day’s Low
- S2 Pivot Point
What might not be completely obvious is that these points were plotted on our chart before the trading day began! Notice how price moves stay confined between the R2 and S2 pivot points, and the main pivot point acts as both support and resistance during the trading day.
How Can You Use These Support And Resistance Levels?
As a day trader, use caution when entering trades that could potentially encounter support or resistance before achieving an appropriate price target. You can also use these levels to exit trades, or manage stops when hit.
If you’re a day trader and currently not using the support and resistance levels I’ve mentioned, give them a try. You just might find that these levels paint a much clearer picture of the markets, and provide better entries and exits with the strategies you trade.
Does this help?
Please leave a comment below.