Options trading coach Jo created a video to show examples of support on charts. Support is an area and not normally a specific number. Traders normally round the support area to “quarters” – $.25, $.50, $.75, $1.00 For example, if support was at $68.17, a trader would either round down to $68 or round up to the next quarter which would be $68.25.
Always look for the support area when evaluating a stock. If the stock is moving downward and approaching the support area, make sure that the stock closes below the support area and then get confirmation of going even lower the following day or two before buying puts. If the stock is moving downward and approaching the support area, make sure that the stock bounces up from support and gets confirmation of going higher the next day or two before buying calls.
Train your eyes to see significant support. Draw support on your charts. Notice that the more times that a stock respects support, the more significant the support.
Most clients of Options Trading Coach Jo struggle with support. Support is an area rather than an exact magical number.
A strong support area is an area that the stock has frequently gone down to and either pops back up or hangs out at that area until it eventually pops back up. The more times that the support area is hit, then goes back up, the stronger the support area.
Traders that look at a chart can easily see the support area. In fact, they may make the decision or tell their broker to buy the stock once it hits the support area and starts back up. Many traders seeing this same pattern will make the same decisions to buy at support. Due to this high volume of buying, the stock price will raise and continue to raise as more traders see the stock bounce up from support.
Support can be a horizontal area, an ascending area or a descending area. Pay attention to these support areas. Start by drawing lines on your chart where you see a support area.
Determine support areas for 3 stocks by drawing lines on their charts. Watch to see if the stock respects the support area and bounces off and back up.
Of course, the support area can be broken. In this case, watch for the next lower support area and watch to see if your stock respects the new support area.
Determining support can be seen as an art rather than a science. Train your eyes to see support areas and your trading profits will greatly be improved.
Most online stock charts will allow you to switch between types. The three main types are bar charts, candlestick charts and line charts. While traders seem to have strong opinions about their preference, I recommend that my stock option coaching clients be open minded about what works best for them.
A bar chart show the open price by the horizontal line on the left side of the vertical line. The closing price is on the right side of the vertical line. The top of the vertical line shows the high price of the day. The bottom of the vertical line shows the low price of the day. The color of the bar is green when the close is higher than the open. The color of the bar is red when the close is lower that the open.
A candlestick chart is normally green or red. If it is green, the open price is at the bottom of the green colored candle body and the close price is at the top of the green colored candle body. The vertical line below the body shows the low of the day. The vertical line at the top of the body shows the high. If there is no vertical line on top of a green candle, that means that the close price was the high price of the day.
A line chart often has red and green segments. You guessed it! Red for down and green for up. There is no data for open and close price. A line chart will quickly and easily give your eye a clear look at trends.
Check out your online stock charting package and experiment with these 3 types of charts. What are your preferences and why?
Some Trading Coach Jo clients have been asking me about how they can best measure momentum. With the current market, I have been using the previous 2 day high/low plus the first 30 minute OR. I use this as a validator just before opening a trend trade. Let me explain:
When a ticker meets all my written entry rules for a trend trade, I then take my last step before entering. I open up a 5 minute, 2 day chart. Part A and Part B both must be met before I will open a trade. The order of Part A or Part B does not matter. They just must both be satisfied. Part A = the stock price is above the high for the previous 2 days. Part B = the stock price is above today’s 30 minute Opening Range (OR).
This type of momentum checker has been very useful to me. It has kept me out of trades and gotten me into the right trades. Hope this tip will be useful to you.