Support and Resistance
The most powerful trading approach in financial market is the support and resistance strategy and it aims to identify prominent price levels of an asset to make intelligent decisions in market. Support and resistance levels are identified by looking at the historical price data and analyzing behavior of an asset at certain price levels. Traders and investors use support and resistance levels to make informed decisions about risk management and buying or selling an asset. Support levels and resistance levels are used by traders in different ways according to their trading style. Breakout trading is an effective trading method used by traders to make an income from the market. In breakout trading, traders take positions only when the price level of an asset breaks the support level or resistance level. For example, if the price level breaks the resistance level of a stock or asset, the breakout trader takes a long position and make profits. Conversely the trader enters into a short position in an asset when the support level is broken. Investors and Traders also use support and resistance levels to manage risks by setting stop-loss orders if the price moves against their expectations
NOTE: Support and resistance acts as a zone and don’t take positions imagining it as a certain price.
SUPPORT
Support level of an asset or a stock is the level at which the price of asset has repeatedly rebounded and is facing a significant amount of buying pressure. Support levels are critical in trading as it provides traders and investors more insights about entry and exit points in trading. Traders can use support levels to understand the exit and entry points there by enables traders to keep effective risk management in trading. For example, if an investor identifies a strong support level in a stock, the investor will wait for the stock price to reach support level to add to his portfolio. This helps the investor to reduce the probability of making losses and can reduce risk by keeping a stoploss below the support zone.
- support is a point where stock stops falling further
- At Support, there are more buyers than sellers
- At Support, there is a trend reversal to bullish
- Support can be broken with large price action movement
- Once stock goes down from Support, it acts as Resistance
Let’s closely understand how to identify a support
Let’s take a real-life example of Tata motors stock chart and identify the support zones. The image shown above is a (1D) day chart of Tata Motors and the stock price of Tata Motors is visible on the right side of the image. We can see that the when the stock price of Tata Motors reaches 390 – 400 range, the is a clear bounce back and buying momentum in stock and which is taking the stock price move up from the 390 -400 range. In the image we can clearly see that recently the stock price has rebounded six times from 390 – 400 making the zone a clear support for the stock. We have marked the support zone 390 – 400 of Tata Motors in a green rectangle box to understand and learn without any complications. For intraday trading, traders can use 5-minute time frame to 1 hour time frame to get better insights. Swing traders or short-term traders can use 1 hour chart – 1 day chart to find key support and resistance levels. When it come to investors higher time frame from 1 day – 1 month will be helpful to understand key support and resistance levels. In conclusion we can understand that Tata motors is having a strong support zone of 390 -400 range and there is high probability for the stock price to bounce back from the zone. But if the stock fails to hold the support zone, there can be more weakness in the stock.
Disclaimer – This is not a stock recommendation; all types of analysis are shared for educational purpose only.
Resistance
Resistance levels can be considered as the price levels which has failed multiple times to break and is facing rejection and steep selling pressure when the price reaches a zone. When the resistance zones are identified by the traders and investors it can be used to make intelligent decisions in the market along with a good risk management. when the price approaches a resistance level, traders and investors consider selling the asset, as there is a high probability that the price will fall back from this level. By understanding important price levels, investors are able to make high probable trades in the market and can make informed trading decisions when the stock moves against expectations.
- Resistance is a point where stock stops rising further
- At Resistance, there are more sellers than buyers
- At Resistance, there is a trend reversal to bearish
- Resistance can be broken with large price action movement
- Once stock goes up from Resistance, it acts as Support
Let’s closely understand how to identify a Resistance
Let’s take the same example of Tata Motors stock price to learn identifying resistance zones. The image shown above is a Day chart of Tata motors and the stock price of Tata motors is displayed on the right side of the image. While analyzing the stock chart we can see that the stock price is facing rejection when it reaches the level of 450 – 460. We can clearly see that the 450 – 460 range acts as a resistance level for Tata motors as the stock is facing steep selling pressure when it reaches the resistance level. In the image we can see that Tata motors stock has taken resistance at 450 – 460 levels eight times making the zone a strong resistance. In conclusion there is high probability that the stock price to bounce back after reaching the resistance level, but if the stock price breaks the resistance zone there will be more positivity in the stock and the stock price will move up. To identify resistance zones, swing traders and investors can use day chart to month chart to understand key levels to make intelligent trading decisions. Intraday traders can use 5min chart to hour chart to getting more insights.
