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Penny Stock Basics

How to Trade Using Support and Resistance Levels

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Written by Timothy Sykes
Updated 4/18/2022 12 min read

If you’re an aspiring day trader, you need to learn how to spot support and resistance levels.

For both shorts and longs, support and resistance are day trading basics. Knowing how to determine them is fundamental to the trading patterns I use.

What’s so special about these levels? Traders can learn to use support and resistance levels to evaluate stocks based on past performance.

If you can’t identify an area of support, how do you decide on a risk level? And if you don’t pay attention to resistance, how do you know when to sell a stock that’s going up? It’s important to learn these things.

I say this all the time … Education should be a TOP priority for any trader. Studying hard and taking it one day at a time is the way to become self-sufficient in these crazy markets.

What Are Support and Resistance?

This trading concept has been around for ages — long before I got started. Support and resistance are among the most important indicators to include in any trading plan … and you MUST learn to identify them.

If you’re not familiar with the terms, here’s a quick primer…

Think of support and resistance levels as areas where a stock needs time to decide its next move.

A support level is a price a stock tends to stay above. For example, say a stock’s falling. It finds new buyers once the selling pressure slows. When the buyers gain the upper hand, the bottom of the pullback is a support level.

A resistance level is basically the opposite. It’s a historically high level for a stock … a price that the stock had trouble breaking through in the past.

Why is this important? Regardless of trading style, traders can use support and resistance to help determine appropriate risk levels. Some penny stock patterns, like breakouts, revolve around watching for a stock to break support or resistance.

If you’re new to trading penny stocks, check out my FREE penny stock guide!

How to Determine Support

how to determine support
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Being able to spot support levels can be helpful. But it’s not exactly easy.

You can’t buy just any bounce and hope the stock will find support there. The most reliable support levels are the unique ones. Be on the lookout for increased volume. More buyers can indicate more strength.

2 year stock chart of SPY
SPY chart: 2-year, 1-day — courtesy of StocksToTrade.com

The S&P 500, aka the SPY, gave us a good example in March 2020. After the overall market had a big pullback, the index bounced back to around the $220 level. Notice the sharp increase in volume during this time.

If the stock market drops to that area again in the future, $220 could potentially act as support. If it breaks through the support level, traders will probably see it as weakness and sell, driving the price even lower.

It’s important to track support levels in multiple time frames. A stock’s history can show you some truly valuable information.

You can also look for an area where a price has defended multiple times. That’s what traders call a double or triple bottom. When a stock fails to break under a price several times, that can indicate it’s hit a strong support level.

For example, look at Tesoro Enterprises Inc. (OTCPK: TSNP).

TSNP stock chart
TSNP chart: 1-year, 1-day — courtesy of StocksToTrade.com

This stock was on fire in early 2021, running from under a penny to almost $2 in a matter of months.

Over the three days from February 9–11, TSNP formed a triple bottom at $1.25. Could that be in preparation for its next leg up?

Buying at Support Levels

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Traders use support levels whether they’re going long or short. When going long, they try to buy in near a support level. Remember — always cut losses quickly if a stock loses support.

Traders buy in at support levels because they expect to see enough strength for the stock to bounce. It’s part of trading psychology.

Even after it’s clear a stock has found support, less-experienced traders might chase it even higher. This action can lead to big price bounces.

One of my favorite trading patterns is the panic dip buy — it involves buying into a support level as it’s forming. I try to get in as close to the bottom as possible … I don’t chase the stock if it’s already bounced a lot.

Here’s a chart of Enzolytics Inc. (OTCPK: ENZC).

ENZC stock chart
ENZC chart: 1-day, 1-min — courtesy of StocksToTrade.com

You can see two major support levels where the price action turned from selling to buying. The stock panic-dropped to just under 7 cents, then bounced to a little over 8 cents.

Then it broke the previous support before dropping again. It went to 5.5 cents and bounced back up to almost 8 cents. Note the increased volume in both these areas. I’ve seen this pattern again and again. And as we see here, sometimes even twice in one day.

With every trading pattern, you MUST keep a tight risk level. Never go into a trade unprepared. Plan out every part of the trade ahead of time, and stick to it no matter what.

How to Identify Resistance

how to identify resistance
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In a way, resistance is the opposite of support. But you need to know the ins and outs. Here’s an example…

Say a stock that’s running for several days finally reaches a parabolic stage with massive volume. Traders chase it at these high prices, hoping for an easy trade. But a parabolic move isn’t a good long opportunity — it’s bound to become overextended.

The stock pulls back, and the traders who chased it are stuck holding at high prices. Often, these traders will hold until they can break even or take a smaller loss.

The price range where the chasers are stuck could act as a future resistance level. This is a theme in the markets. Take notes and learn to be on the right side of the action.

Selling Near Resistance

In these wild times, it’s easy to forget what a regular market feels like. We’re seeing multi-day runners tear through resistance levels.

But when the market isn’t completely on fire, selling near resistance is the goal for many day traders. Because of the chasers, these levels can stop a stock from going higher.

Remember this strategy. We might stop seeing such crazy volatility, and resistance levels might again become a big hurdle for stocks. That’s something every trader has to consider.

It takes discipline to navigate a changing market. Get my “Volatility Survival Guide” now for no cost and start prepping!

Why I Buy Breakouts

why i buy breakouts
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Another trading pattern I have in my arsenal is a breakout. A stock breaks out when it passes a resistance level. Once that happens, there’s typically way less selling pressure. So the stock has room to make gains.

Here’s a recent example of a big breakout over massive resistance with Sundial Growers Inc. (NASDAQ: SNDL)…

SNDL stock chart
SNDL chart: 1-month, 30-min — courtesy of StocksToTrade.com

On the morning of January 28, SNDL traded over 300 million shares in under a few hours. It topped out at $1.35, then pulled back over 50% to 66 cents.

At that point, it appeared the chasers were trapped. A lot of people were stuck holding the stock near those morning highs. For the next seven days, SNDL retested the $1.35 area several times and couldn’t break through. There was too much selling.

Finally, on the morning of February 9, it broke through the resistance level. This breakout led to the stock hitting almost $5 on February 11. It’s a great example of the potential behind this pattern.

You need experience and dedication to learn these patterns. If you’re ready, check out my 30-Day Bootcamp! It takes you from basics to patterns and beyond in just 30 days. Get it today!

Apply to My Trading Challenge

Midwest Traders
© Millionaire Media, LLC | Dominic rises for a shot over Jack while Tim & Michael look on

If you’re a dedicated student of the markets, check out my Trading Challenge. I started the Challenge so I could teach traders how I trade penny stocks. Including how to recognize patterns based on support and resistance.

If you think you’ve got what it takes, apply to join the Challenge. But I don’t accept everyone — only the hardest workers make the cut.

If you’re accepted, you’ll be a part of our Challenge chat room. It’s an opportunity to network with other hard-working traders. There’s so much you can learn!

You’ll also have instant access to TONS of learning material — video lessons, webinars, and more. Plus, I post all my trades, including my losses, on Profit.ly so you can study and learn from them.

I’ve been trading for 20 years and teaching for over 10. I’ve now had several six- and seven-figure students who became self-sufficient by using just a handful of trading patterns.*

If you have the dedication, the Challenge can help you develop an eye for patterns. Apply today and start your journey!

(*These results are not typical. Individual results will vary. Most traders lose money. These traders and I have the benefit of many years of hard work, experience, and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose.)

The Bottom Line on Support and Resistance

the bottom line on support and resistance
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Successful traders know how to recognize support and resistance levels. Those who fail to respect the fundamentals aren’t just using an incomplete trading plan … they’re also showing their arrogance.

Some of these concepts have been around longer than we have. They’re time-tested … so learn to ride the wave instead of going against it.

And remember, the markets constantly change. Right now, the abundance of runners is awesome! It can almost make support and resistance seem irrelevant. But that couldn’t be further from the truth.

If the market starts to slow, don’t get stuck chasing. Study the trading basics, like support and resistance, as much as possible.

Learn aggressively and trade wisely. You’ve got what it takes to become a self-sufficient trader.

How do you use support and resistance in your trading? Let me know in the comments!

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”