Every time you see an expert speaking about trades, he uses the terms Support and Resistance. Support and Resistance act as barriers on any chart. You can find these levels on any table, whether it be equity stocks, Options, Futures, Currency, or Commodity; also, there is no restriction to the timeframe of Candles (if you are using a candlestick chart).
Let’s study them in detail.
To begin with, it is elementary to identify support and resistance levels, but trading using them is quite tricky. Various patterns of Support and resistance can be seen, but this article will be limited to the basic model. The rest will be covered in further articles.
Support is a price level that can be seen in charts with a downtrend. Any asset whose price is reducing tends to stop at some particular level and bounces back from the same level. If you observe, you will be able to see that the same stock has used the same standard to bounce back in its previous history as well. Support levels are formed due to the Demand-Supply mechanism.
This is a Nifty 50 chart on a 1-day timeline. As you can see, Nifty is taking Support at 10630 levels. It has taken Support many times at the same level; recently, once again, it took Support at the same level.
Resistance is just the opposite of Support. It is the price level in an uptrend at which the chart reverses and starts a downward movement. Support Resistance level also repeats the same pattern multiple times.
In the same Nifty chart, you can see a resistance level at 11120 levels.
How to use this during trading?
It should be noted that you can draw multiple Support and resistance levels in a single graph. There are four conventional approaches using Support and resistance levels to trade.
The timing of some trades is based on the belief that support and resistance zones will not be broken. Whether the price is halted by the Support or resistance level, or it breaks through, traders can “bet” on the direction and can quickly determine if they are correct. If the price moves in the wrong direction, the position can be closed at a small loss. If the price moves in the right direction, however, the progress may be substantial.
Let’s understand Technical Analysis; Support and Resistance Levels:
- Buying at Support:
If a stock is in a downward trend, and it is seen taking Support at some level, Traders buy the stock, set an SL below the support level. If the stock bounces back, the trader makes a profit from the same. Trader exits the trade near the resistance level.
This is a chart for Ultratech Cement.
It is range-bound between two support levels and resistance. The trader will buy Ultratech Cement near 3733-3750 levels, i.e., 1st Support, set SL at 3690 levels, i.e., 2nd Support and exit his trade near 3940 levels. That will give him a risk/ reward ratio of 1:5 approximately.
- Selling at resistance:
If a stock is in an upwards trend, and it is seen taking resistance at some level, Traders short sell the stock, set an SL above the resistance level. If the stock falls back, the trader makes a profit from the same. Trader exits the trade near the support level.
Consider the same UltraTech Chart.
This time traders reverse the trade. If Ultratech Cement reaches, 3943 levels, they short sell the stocks, keeping SL near 4012 levels, they tend to buy back stock near 3690 levels. They are earning similar profits.
- Selling at Support:
Support and resistance levels are hypothetical, and stock prices can also break these levels at times, it is usually observed that if a stock splits a particular support/ resistance, it can give massive profits in the same. Trader’s short sell stocks when the support level is broken and buy back shares near the next support levels.
This is Bank Nifty Chart on 30 min timeline. This is a trade which was taken by me on Friday. I shorted Bank Nifty when it broke Support at 22700 levels, and I squared off my position at 22450 levels. Nearly 1% return in a single day. Considering margins available for Intraday Trades, I made a healthy 8% profit in a single day.
- Buying at resistance:
Similarly, If a stock breaks resistance levels, it can give significant results.
Bajaj Finance on a daily chart. Once Bajaj Finance breaks the resistance level, It surged up to give a 27% return in just 12 days.
- Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.
- Support occurs where a downtrend is expected to pause due to a concentration of demand.
- Resistance occurs where an uptrend is expected to pause temporarily, due to a concentration of supply.
- Market psychology plays a significant role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
Also Read: Investing Ideas: Dividend Capture
- Support and resistance areas can be identified on charts using trendlines and moving averages.
Disclaimer: While spotting Support and resistance levels on a chart is relatively straightforward, the standards are based on past price moves, offering no real information about what will happen in the future.