Support And Resistance
In the stock market, there are generally two types of analysis -
Fundamental Analysis - This technique is used to evaluate the intrinsic value of an asset and analyse the factors that could influence its price in future. It is used for long term investing.
Technical Analysis - Generally used for intra-day trading, it helps in examining and predicting the price movements using stock prices and historic data. One of the most important tools used in this analysis are the support and resistance levels. These are the specific price points which attract maximum buying and selling of shares.
Support is the price at which one can expect a larger number of buyers compared to the sellers. The support level is always below the current market price. Whereas resistance is the price at which one expects a larger number of sellers as compared to the buyers . The resistance level is always above the current market price.
Support is the point at which there is a very strong demand in the market and it prevents the price from further falling. Whenever the price falls till the support level, it mostly bounces back . Generally we decide the support level by analyzing the candlestick patterns and tracking the bounce back of price continuously at least for 3 to 4 times. The support level acts as a trigger to buy.
Resistance is the point at which there is very strong supply in the market and that prevents the price from further rising . Due to very strong supply there are a lot of sellers available in the market as compared to buyers which leads to a decrease in the price of the stock. It is one of the critical technical analysis tools which market participants look at in a rising market. It acts as a trigger to sell.
How to determine Support and Resistance level ?
To determine the support and resistance level, follow the following steps-
Step 1 : Load Data points
Usually ,if one wants to identify short term S&R levels, then they must use 3-6 months data and to identify long term S&R, use 12- 18 months data.
Short term S&R is useful for intra-day trading while long term S&R is useful for swing trading.
Here is the 5 Year Daily chart of Bharti Airtel and TCS respectively.
Step 2 : Identify price zones and wait for them to touch the zones.
After loading the data points identify at least 3 price zones and wait till the time it touches the price zones and bounce back. The smaller time frames have more signals as the zone may get hit more frequently, so you need to be more focused if you are trading small time frames.
In this chart we have encircled certain price zones which will help us in determining our Support and Resistance Level respectively.
Step 3 : Align the price action zones and fit a horizontal line.
After identifying the price zones and data points we search for at least three points of the same price level which helps us in forming a straight line. After identifying the price zones we need to check whether they are at the same price level or not . We need at least three price points at the same price level and then align them and draw a line to highlight S&R.
Here is the chart of Bharti Airtel with Support Level of INR 284.3
Here is the chart of TCS Ltd. with Resistance Level of INR 2280.00
Step 4 : Identify Entry / Exit trade points.
After identifying and aligning them in a line, our support and resistance levels are determined. Then, identify a range from the above lines. Always give some room for error.
Here are we all set , ready to perform technical analysis and hit the targets.
Do Support and Resistance Level hold forever ?
Under certain circumstances , by the forces of demand and supply ,these support and resistance levels can break and can create massive stop loss triggers which in turn lead to exponential moves in that direction. If support level breaks then the Support level is converted to Resistance level and if resistance level breaks then the Resistance level becomes Support level.
Here is the chart of Greavescot Cotton breaking its support level.
While trading, always keep in mind that ‘History tends to repeat itself’ so go with the belief that ‘Support and Resistance Level’ will be honored.