Support and Resistance is the basis of Technical Analysis and it works in all different types of market whether it is an Equity Market, Commodity Market, Currency Market or Bond Market. The concept of Support & Resistance is easy to understand. These are the point or range where the forces of supply and demand meet. It is the movement in the price of a stock which will tend to stop and reverse at certain point or range. It is one of the most important aspects of Technical Analysis.
The entire Technical analysis is based on two words i.e. Support and Resistance. It is the core of the technical analysis. Everything related to trading decision of either buy or sell are revolved around this two basic terms. It is a simple a way of saying that support is an area where price should rise after touching that level or range and Viceversa for Resistance.
Support and Resistance can be identified on time frame chart whether it’s an EOD chart, Intraday chart with multiple time frame like 5 min, 15 min, 30 min Hourly etc. Support & Resistance is an indicative price on charts where on historical basis the stock had the difficulty on crossing those levels. These are the levels which prevent the stock from rising or falling from that level and go any further.
Beyond the conventional approach, support and resistance can be dynamic at times. For Eg:-
- On the basis of Moving Average
- Fibonacci Levels drawn with in context with Extension and Correction
- Pivot Points (Hourly, Daily, Weekly or Monthly)
Horizontal Support and Resistance
A Support level is the price at which buyers are expected to enter the market in sufficient numbers to absorb the selling pressure and take control from the sellers. It is an area where buyers are expected to overpower the bears and take control of the market. It will act as a base for the stock to trade on that level and make a new high on the basis of its recent support. It is an area where bulls try to control further the falling price in the stock. They are also called static support.
A resistance level is the price level at which sellers are expected to enter the market in sufficient numbers to absorb the buying pressure and take control from the buyers. It can also be called classic resistance level or static resistance level. This resistance point is a key area where price upraise is being interfered by the bear’s activity.
Role Reversal:- Support levels, once penetrated, frequently become resistance levels and vice versa. The market logic is fairly simple: buyers who purchase near a support level, only to see price fall, are likely to sell in order to recover their losses, when price rallies to near their break-even point. The support level then becomes a resistance level. Viceversa. Once the trend is established by breaking either support or resistance then price should start trading above that broken resistance level and should hold that level and same way it should start trading below if the price has broken its support and show its sustenance below that newly made resistance level else it will lead to a false breakout if price didn’t sustain those newly broken level.
ROLE REVERSAL EXAMPLE
How to find Support & Resistance:-
Support and resistance can be found with various ways like using Volume, Candlesticks, Moving Average, Fibonacci Levels, Pivot Points etc.
- One of the most important way of identifying the support and resistance is to look out for the level or range where prices tend to stop or where there has been maximum level of accumulation in the stock. In simple words whenever price comes at the same level by making a formation like U, V or Inverted U, V, can be considered as a support and resistance. Refer the Diagram Below:-
Classic Support and Resistance
- Major Price tops and bottoms in markets are also major resistance and support levels. Whenever the market tends to reverse from its previous swing high and swing low it will act as a support and resistance. This swing high and swing low is an area of forces of demand and supply and a reflection point of a fight between bulls and bear. Recent swing high and swing low has always a greater significance in identifying the support and resistance. Trader should enter into the market whenever price comes in the range of its support and short sell whenever the prices goes into its swing high range. The candlestick high and candlestick low will be an ideal level to keep stop loss. Refer Chart Below:-
- Another way to discover support or resistance areas is by looking at “retracements” of a significant price move–price moves that are counter to an existing price trend. These moves are also called “corrections”. Retracement is basically a temporary or small movement against the primary trend. Or in a simple way we can say a move against the trend. It is very important to identify retracement and reversal. There is a very subtle difference between the retracement and the reversal. If reversal is wrongly interpreted as a retracement then it will lead the trade into disaster.
- Support and Resistance levels for markets can be determined by “psychological” price levels. Psychological price level is a concept which is used to influence the traders for buying or selling the stock. Traders respond in a better way when they see some psychological type of prices and they end with 0. For example, 100, 200, etc.
- Look at the above chart Candlestick formed on Hourly chart on 25th Sep 2012, the Opening big red candle on hourly chart. High was 572 and thereafter all the candles were made in that body of Big red candle until 28th Sep 2012. Now today it has taken support at 531 on hourly candle which was also the candle of big volume green candle on hourly chart. On 21st Sep 1:15 pm. Getting the support from there on hourly chart will make it break this 548 and then it will probably find some strong pressure at 560 On hourly chart (Dark cloud cover Refer candlestick Chapter)
Multiple Support and Resistance Zone is another type of support and resistance zone which can also be termed as a congestion period. The term simply explains that an area where there market has made sudden spikes with different highs or lows in the variation of within 1%-2%. Generally, the support and resistance can be determined very precisely with the help of candlesticks. Candlesticks lowest and highest point during the wave swings of high and low is generally termed as a support and resistance level. Two consecutive closing above the high of the resistance zone reflects the breach of the resistance and a hit of trend reversal.
So ideally, one should trade on the basis of candle closing on any time frame. When at the top of the trend a formation like Dark cloud cover (refer chapter candlesticks) gets formed, it is signal of bears entering into the market and can be a possible reversal from that point. Similarly, when a piercing candle (refer chapter candlesticks) type of formation is made at the bottom of the trend hints the reversal of the trend and presence of bulls at that level. However, to avoid the confusion one can choose the recent support and resistance for trading. Kindly refer the below diagram for a clear picture to understand the multiple support and resistance zone.
*Kindly refer the respective chapters.
At times, traders also use another term called confluence level. It is nothing just a simple point of intersection of different levels based on different parameters. Eg:- The intersection point of Pivot Level Support *, Moving Average Support* or Classic Support*, all these indicators meeting at the same point. So, this will become an area where two or more trading analysis tools come and intersect each other. So, if we are looking for a confluence point in the market it would simple be taken as a level or point where more than two trading analysis coincide.
Breakout Support and Resistance is an indication of trend continuation. Generally, price has the tendency to trade in a range just like the law of vibration which means nothing rests at constant instead everything moves. Like when price of a stock has raised to a level it starts falling down plenty of factors may be associated in the decline and vice versa for its rise too. When the price starts falling down from the same level from where it had fallen down in its previous fall, it is because traders or investors are people who have memories and they can recall the incidence of history which earlier was a barrier for the price to cross the level. When people look things in retrospect they tend to find the semblance in the nature of downfall.
However, when we talk as nothing is constant, same way the support and resistance is not permanent. They also get change with time in relation to the current market principle, scenario objective etc. The sentiments like fear, greed exuberance excitement panic etc are the result of the breach of those levels. If the previous support and resistance is broken it can be termed as a fresh breakout and beginning of a new momentum. Many times what happened is when any importance support and resistance is broken with heavy volume that particular level will then reverse its role and will do the contrary. Refer the below chart for its better understanding:-
Entry on Multiple Time frame
An ideal way trading into stocks is by looking on multiple time frames. If we talk about trading intraday multiple time frames would be like 3 min, 5 min, 7 min, 10min, 15 min hourly chart so on. Now if we have to trade for intraday, look for two time frames like combination of two time frame charts like 15 min and 60 min. Now 60 min time frame would ideally be a longer duration of time frame and trend established on hourly chart i.e. 60 min chart is expected to stay in trend for another 3-4 days before it turns into sideways.
So by identifying the primary trend for next 2-3 days on hourly chart, the second step would be the entry point. Now, on smaller time frame if we are seeing the chart of 15 min while considering it a short term trend, we have to look for support and resistance on hourly chart or 60 min chart and go for the trade in accordance of primary trend.
If primary trend is bullish which 60 min chart is and short term trend is also bullish i.e. 15 min chart, long call on that stock can be initiated. However, if there is disconnect between the 60 min chart and 15 min chart, that trade should be ideally avoided. Though, profit potential may exist in contra trade also however, the risk factor in that trade is very high.
Quick Points to remember while Determining the Strength of the Support and Resistance:-
- The number of times that the level has been respected. Generally, the smart trader will wait for the price to come near to its support and resistance and if that level is respected then the trader will buy or sell the stock. The crossing of this range or level would mean the momentum would continue for some more time. The more the price comes in the previous range of support and resistance and if that gets sustained the stronger that level will become. If any breach of that level happens then there will a strong reversal and it will act as a trend reversal.
- The amount of volume that has been traded near the level. This is another way of identifying the support and resistance. If at certain level price has been trading for quiet sometime with volume in that particular area then that level will also act as a support and resistance. Refer the below chart for a better understanding:-
- Whether the level is old or new – recent levels have greater significance.
- Whether the level is a new High or new Low – more extreme levels have greater impact
- A level formed at a round number (e.g. 200 or 350.00) leaves a lasting imprint. There are some many traders who measure the price with psychological basis. If the price is at even number ending with 0 they feel the stock price will act here as a support and resistance. These type of traders always gives more importance on the price rather than the trend or momentum in the stock. This is a very good tactic to trap the small traders.
Support and Resistance is the basis of technical analysis. It is very important to find out the relevant support and resistance. After identifying the support and resistance, finding out the trend in the stock is very important. Once the established trend is identified one should find out the trading opportunities like entry or exit near its support and resistance. Trends can be identified by various technical tools like by using Moving average, Pivot Point, indicators etc. Identifying the trend is very critical for any trader.