what is support and resistance?
In an exercise of technical analysis, traders actively looking for trends, patterns, and breakouts to speculate the share prices of any particular stock.
The two major attributes used in technical analysis to identify breakouts and trends are Support & Resistance.
Support and Resistance are basically virtual limits or boundary, set by any particular stock on itself.
This limits either inform traders about exit point, entry points, breakouts, initiation of an uptrend, and downtrend.
In technical analysis skills, it is very important to identify Support and resistance.
Let’s understand both one by one.
What is support?
Support is basically those price points where the downtrend is expected to pause.
Or, support is basically those price points where trend reversal (where stock prices change their movement from downtrend to uptrend) is expected.
Stock prices may or may not break support, there are always breakout chances since no one can predict the stock market.
What is Resistance?
Resistance is basically those price points where the uptrend is expected to pause.
Or, Resistance is basically those price points where trend reversal (where stock prices change their movement from uptrend to downtrend) is expected.
There are also 50/50 chances that resistance may break.
- Remember, support and resistance are basically virtual price points, where trend reversal chances are slightly greater than other price points.
To be more certain, investors should observe and study Candlestick patterns and indicators also.
Understanding Support and resistance
- There will be multiple support and resistance in a day, week, and month, identifying them is very important.
- New support and resistance are the results of the breakout, if previous resistance is broke it means new resistance will be formed, the same procedure for support also.
- Its often observed that after the breakout when new resistance is achieved then the old resistance will become new support, similar to when new support achieved the previous support will become new resistance.
- Stock market basically works on investors’ sentiments for a short time hence, support and resistance sometimes trigger themselves.
- Support is basically buying point for traders and resistance is a selling point, when support achieved traders start buying stocks, and after when resistance is achieved traders start selling those stocks.
How to identify the Support and Resistance
1. Usually traders buy when prices are at the bottom and, sell when it is high (unless you are not a short-seller).
first investors need to identify the support first, studying previous price action will guide investors to identifying support.
2. let’s see with an example,
the red line represents support, and the green line represents resistance.
3. it was clearly visible that, stock prices nearly touched the red line multiple times so, it is a major candidate for support.
similarly, for resistance, we clearly see trend reversal from the green line so, it will going to be resistance.
4. sometimes support and resistance is clearly visible, in the following example you can clearly identify support and resistance, the pattern is clearly visible.
this support and resistance are highly suitable for short-term gain, short-term traders are actively looking for this type of pattern.
5. identifying breakout is also the most important, unable to identify breakout will cause investors very high loss.
breakouts are of two types
uptrend & downtrend.
let’s see one by one.
6. downtrend breakout means when stock prices of any particular stocks broke their support and traded at much lower prices, it will cause investors very high loss since they are expecting a price surge.
7. to identify a downtrend breakout, investors simply keep an eye on support.
whenever prices broke their current support it is an indication that they are going to the formed new support and will be traded at much lower price points.
in the example, below we clearly see prices broke their support and formed new support, and traded at much lower price points.
8. in uptrend breakouts, whenever prices broke their current resistance it is an indication that they are going to form new resistance and will be traded at much higher price points.
in uptrend breakouts, investors lose the opportunity to increase their potential wealth.
in the example below it is clearly visible that price broke their resistance and formed new one and traded at much higher price points.
9. it often observed that whenever prices broke their current resistance and formed a new resistance, then the previous resistance become new support.
similarly for support when prices broke current support and formed new support, then the previous support becomes its new resistance.
in the following example, it is clearly visible.
10. sometimes support and resistance is not very clear and sometimes prices may not touches the support and resistance,
in the following example support and resistance are clearly not accurate but, the up and down or zigzag pattern is clearly visible,
so it’s important to understand patterns and price movement also, to generate profit.
Importance of support and resistance
- Support and resistance is a very important step for traders to book short-term profit.
- Identifying support and resistance will help you to set the proper stop loss.
- For intraday traders, support and resistance will help to set a realistic stop-loss, to prevent further loss.
- Support and resistance with candlestick pattern analysis are crucial steps to becoming major in technical
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