What Is Support?
In technical charts, support and resistance are the two levels that can be used to identify price points where the probability of a pause or a trend reversal is high. A support line is the lower price limit formed during a downtrend. A downtrend is a situation where supply or selling pressure is greater than demand or buying actions. As a result, the price of security falls. A support level is formed where the freefalling price comes to a halt as buyers enter the market and demand rises to a level where it matches supply.
In technical charts, support is the price level or zone where the trend reversal begins. At this level, as demand outweighs supply, the downtrend changes to an uptrend, and the asset price starts increasing. For example, key moving averages, such as the 18, 50, and 200, also act as support.
What Is Resistance?
The opposite of a support level is resistance, which forms during an uptrend.
Asset prices rise because there is more demand than supply. It will reach a level where selling interest intensifies, preventing the price from advancing further. It can happen for several reasons. The buyers may think that the price level has reached the target level. It may result in a decline in demand. Moreover, demand pressure can wane due to changes in macroeconomic conditions or industry/company levels. Where the price hits the upper limit in the technical chart is called a resistance level.
Traders use technical analysis tools like trendlines, moving averages, or chart patterns to identify support and resistance levels. The resistance acts as a psychological and strategic threshold, indicating a point where supply outweighs demand, leading to potential price pullbacks.
Recognising support and resistance levels is crucial for traders, as they use those as markers to make informed decisions regarding entry and exit.
What is Support and Resistance?
A share is said to have taken Support at a price level when in a downward move, it stops and moves in the upward direction. Vice-versa, a share is said to have taken Resistance at a price level when in an upward move, it stops and moves in the downward direction.
How can I utilize the Support and Resistance theory?
Ideally in an Uptrend, one should buy or go long on every fall at a significant support level and in a Downtrend one should sell or go short on every rise at a significant resistance level.
ARE THERE ANY TOOLS FOR SUPPORT AND RESISTANCE?
Yes. Following are the tools for Support and Resistance:
- Significant Highs and Lows
- Trendline
Significant highs and lows are those levels from where the markets have turned up or have fallen down sharply in the past. When the stock prices test these levels anytime in the future, they will act as strong support and resistance levels. A Trendline is another excellent tool which gives us important Support and Resistance levels. A trendline is a line joining 2 (preferably 3) or more significant highs or lows or 2 (preferably 3) important prices, which gives important support and resistance levels.
Support and Resistance Reversals
The support and resistance reversal situation occurs when the price experiences a breakout. It indicates a significant price movement and occurs when the price moves beyond the precious support or resistance levels, only to change its direction later. In this situation, the previous support level converts to a resistance level, and the resistance level charges to the new support level.
Analytical charts provide visual representations of support and resistance zones and allow them to make informed decisions.
FAQs
Support and resistance levels work as psychological thresholds where supply and demand dynamics shift. The support level indicates where buyers enter and end the price fall. Similarly, at the resistance level, the sellers enter and prevent the price from rising further. Support and resistance levels are identified through technical analysis techniques. Traders look at previous price points to identify where the price movement has halted or reversed. Traders use trendlines, moving averages, chart patterns, and volume analysis tools to identify support and resistance. Resistance trading refers to the high volume of trading happening at the price zone where a financial instrument’s upward movement is expected to stop or reverse due to heightened selling interest. Traders use them to determine entry and exit points, set stop-loss and take-profit orders, and gauge potential price reversals. When support or resistance levels are broken, it results in bearish or bullish waves. Hence, several bearish or bullish candlesticks appear after the breakout. How do support and resistance levels work?
How to identify support and resistance levels?
What is resistance trading?
What roles support and resistance play in trading strategies?
What happens when support and resistance are broken?
