Support & Resistance Levels
Using levels ahead of price to plan exits.
Overview
Before entry, levels tell you where to trade. Once you are in a position, they tell you where the trade is likely to struggle, where to take profit, and where the idea stops being valid.
The Level Ahead Sets the Expectation
The next significant level in the direction of your trade is the most important price on your chart. It is where the move is most likely to stall, and where the crowd will be taking profit.
Knowing that level before entering means the trade has a defined objective rather than an open-ended hope.
Targets Belong Before the Level
Place take-profit orders slightly before an obstacle, not at it or beyond it.
If resistance sits at 100, a target at 99.5 fills reliably. A target at 100 competes with everyone else's orders and may be missed by a fraction. A target at 101 requires the level to break, which is a different trade from the one you took.
Reading the Reaction
When price reaches your level while you hold a position, watch how it arrives and how it behaves.
- Arrives fast, stalls immediately: Likely rejection, consider taking profit
- Arrives slowly, grinds through: Acceptance, the level may flip and the move continue
- Wicks through and closes back: Rejection confirmed
- Consolidates just beneath: Often precedes a break through
Levels Behind You
Levels your trade has already passed become the natural home for your stop. A long that broke resistance should not, in a healthy scenario, close back beneath it.
Trailing a stop from level to level as price advances is more robust than trailing by a fixed percentage, because it follows structure rather than an arbitrary distance.
When the Level Fails to Hold
If price breaks the level supporting your position and closes beyond it, the reason for the trade has gone. Waiting for a return to breakeven is not a plan, it is a hope, and it is where controlled losses become large ones.
Weaknesses & Limitations
- Every level eventually breaks, including the one holding your stop
- Exiting at the first level can mean missing much larger moves
- Levels are subjective and may not be where you drew them
- In strong trends price cuts through levels with no reaction
Example Use
A trader long from 95 marks resistance at 110. As price approaches 108 it stalls with long upper wicks on rising volume. They close two thirds at 108.5 rather than waiting for 110, and trail the remainder beneath the most recent higher low.
Risk Management Notes
Decide your target levels before entering, while you have no position and no bias. Targets chosen while holding a profitable trade tend to move further away, which is how open profit becomes a closed loss.