If you have started to learn stock market you will come across many terms related to stock market. One of such a important term is support and resistance. Lets discuss support and resistance levels of stock in detail.
Support and resistance levels of stocks are very important to your trading; it’s critical that you understand them.
Support and resistance levels of stocks are points where a chart experiences recurring upward or downward pressure.
When the demand of a given stock is higher the prices are likely to increase, if this demand is not met by sellers. Equally as supply increases, prices are likely to decline. When supply and demand are equal, prices move sideways as bulls and bears fight for control. It is not rocket science to identify Support and Resistance of stocks, and it can be applied to any market, ie Stocks, Commodities or Forex. Chart patterns are bound by support and resistance levels.
A support level is usually the low point in any chart pattern (hourly, weekly, or annually), whereas a resistance level is the high or the peak point of the pattern.
These points are identified as support and resistance when they show a tendency to reappear.
What is Support?
Support is the price level at which buyers are expected to enter the market and this will prevent the price from falling further.
The market has memory, so as the price declines previous low, buyers become more likely to buy and sellers become less likely to sell. By the time the price reaches the support level, buyers will enter the market in sufficient numbers to prevent further fall in the price and creating a support level.
After a support level is penetrated, it often becomes a resistance level; this is because investors want to limit their losses and will sell later, when prices approach the former level.
What is Resistance?
Resistance is when the price stops going up. This is a level where sellers are expected to enter the market in sufficient numbers to prevent further increases in prices, and also a level where the buying interest has decreased significantly.
This is a level where supply will overcome demand and prevent the price from rising above resistance.
It’s best to buy near support or sell near resistance levels that are unlikely to be broken. Once these levels are broken, they invariably reverse their roles.
Previous support becomes resistance and previous resistance becomes support. thus support and resistance level of stock helps as a technical indicator in technical analysis.
In uptrends, every time the price drops to the uptrend line and then resumes its advance, the trendline has acted as support to the price uptrend.
Support can also be found at prices of previous support or resistance.
In downtrends, every time the price rises to the downtrend line and then resumes its decline, the downtrend line has acted as resistance to the upward move of market prices.
How to use support and resistance levels of stock?
Consider the following: when price action drops to a certain level, the bulls (the buyers) take control and prevent prices from falling lower.
Similar to support, a resistance level is the point at which bears (the sellers) take control of prices and prevent them from rising higher.
The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations. The bulls think prices will move higher and the bears think prices will move lower.
Support levels indicate the price at which a majority of investors believe
that prices will move higher, and resistance levels indicate the price at
which a majority of investors feel prices will move lower.
The development of support and resistance levels of stock is probably the most noticeable and reoccurring event on price charts.
Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.
The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it’s believed that demand will overcome supply and prevent the price from falling below support.
Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.
The logic dictates that as the price advances towards resistance, sellers
become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it’s believed that supply will overcome demand and prevent the price from rising above resistance.
Understanding and the use of support & resistance levels of stock indicator can drastically improve the results of any trader, as it can enable a trader to forecast where the prices are likely to prop up in the event of a correction or indeed a rally could just stop at a major resistance level, enabling the trader to bank profits and also to consider reversing the position.