Trading Support and Resistance with Penny Stocks

A key element of trading support and resistance with penny stocks is understanding market psychology and how it affects when a penny stock’s price will break out and produce a significant move. Believe me when I say, the principle of support and resistance is one of the most reliable principles of technical analysis, and I don’t think I would be remiss if I said that it doesn’t take an understanding of too much else to be able to profit in penny stock trading. You can learn about support and resistance, and actually build a trading career on that principle alone, if you are patient and willing to learn how to perfect that particular methodology. Support and resistance basically represents certain psychological barriers that a given market has as far as the price of the stock is concerned. In other words, support and resistance defines the “boundaries” of a stock’s price for a given time period. For those who may be unfamiliar with the terms, “support” basically acts like a “floor” for a stock’s price, and no matter how far down the stock’s price goes, the support price is a price that the stock has never fallen below. “Resistance”, on the other hand, is basically a “glass ceiling” for the stock’s price; it’s the price level that the stock cannot seem to exceed, try as it might. With resistance, there may be times when the stock’s price makes a run up, but when it bangs into that resistance level, it almost always retreats down to a lower price. For instance, if a stock is trading at an average daily price of $2.00 per share, it may at times hit the $3.00 level, but then go right back down to the mid-$2.00 price. There may be multiple times that the stock’s price will bang up against that $3.00 level, but if the price of the stock has never exceeded $3.00 per share, you have just found your resistance level.

Conversely, if that same stock’s price has never seen a day below $1.50 per share, no matter how many times it has fallen to the $1.50 level, you have just found your “floor”, or your support level, for that particular stock. Once you understand these levels, they become vital in understanding how a stock can make strong moves upwards (or downwards) once these price levels are violated. Let’s say for instance that our same “example stock” that has an average trading price of $2.00 per share all of a sudden has a day where the price breaks out above the $3.00 level and CLOSES above the $3.00 level (let’s say $3.40). This is a very significant move, and even more significant if the closing price has violated the $3.00 resistance level. Without knowing hardly anything else about that stock, I can almost guarantee that the stock will see a run up in price, because resistance levels are rarely ever violated only to retreat back down. Again, you can see the stock’s price hit a resistance level, WITHOUT violating it, and then see it decline back to the state of “normal”, but it’s rare that you see the stock’s price trade through that level without some kind of subsequent spike in price. The reason for this is based on the same principle as how the four-minute mile was achieved—nobody believed it was possible until RogerBannister proved it, and then all of a sudden you had people all over the world running four-minute miles. The same is true with a stock’s price—once traders understand that a stock’s price CAN trade above that well-known resistance level, they will many times jump on board, begin buying en masse, and push the price of the stock up to unprecedented levels. In conclusion, this hub is really just a very general overview explaining what trading support and resistance is all about…there are so many other aspects of it that I don’t have the time or space to cover here. Needless to say, if you can understand this very basic principle, you will begin to see over and over again how great profits are made in the stock market.