What are Support and Resistance?
They are the pressure areas in a stock chart where the area of support tries to hold a falling price and the area of resistance blocks a rising price.
These are the patterns created by shifting of sentiment of mass trading mind between bullishness and bearishness. They are the back bone of any technical analysis and stock trading. If you cannot determine trend of the market and if you cannot recognize the ares of support and ares of resistance, you cannot trade successfully.
Trend is your friend. Dance with the friend. Tune to the trend.
Man tends to have memories of past events. It may be an experience of success, joy, triumph, failures, accidents, profits, loss, etc; When he comes across a prop which can bring back the past memories, will activate a thought process, which will influence the persons decisions and thus his life.
To understand this, I will give a routine example which all you would have experienced. You might have been engrossed in your work or reading an interesting novel. At 2.00 pm when the clock strikes twice you suddenly feel aware of hunger and feel the pressure to move to kitchen or restaurant.
In trading there are areas in the collective mind of traders, where they are influenced by the memories of previous actions or events. When they see the stock price which is at or near such an area they are consciously or subconsciously take some action like booking profits or creating a new position or adding to the existing position or moving a stop loss order, etc;.
Such actions are recorded on our stock charts as swing tops, swing bottoms or areas of congestion. That is why I say the stock charts are like EEG of traders collective mind.
A falling price tends to find support at some price levels and bounces up. These are the places where a bearish trader turns bullish. At these levels the stock appears to be attractive to buy. But if the selling pressure increases to break this level, the prices continues to fall until it finds one more support.
Similarly a rising price tends to find resistance at some price levels and retreats back. These are the places where a bullish trader turns bearish. At these levels the stock appears to be overpriced. But if the demand increases to break out this level, the prices continues to rise until it finds one more resistance.
These areas of resistance and support can be joined by straight lines called trend lines, which not only tells the direction of the market trend but offers resistance and support in the future.
Study the graph given below.
Observe how once the line is broken support becomes resistance and resistance becomes support; how trend changes from up to down, and down to up.
Stock trading is all about finding the trend of the market, finding the areas of support and areas of resistance along with the study of volume and open interest. So lack of knowledge of support and resistance is an handicap in stock trading.
Always buy above a support with stop loss order below the support and sell below the resistance with stop loss order above the resistance. This offers least risk and increases the risk reward ratio for the trade. This increases your profitability.
If the price takes support more number of times on a support area, the support is more stronger and if the price hits on the resistance area more number of times the resistance is more stronger. 5 hits is more stronger than 3 hits.
These areas of support and resistance act conversely. That is, as long as the prices are above these pressure areas, they act as support and as long as the prices are below these pressure areas, they act as resistance.
Once the stock price moves below a support area, the support becomes resistance and once the stock price moves above a resistance area, the resistance becomes support.
Resistance and support of higher time frame rules over the support and resistance of lower time frame. So a price range of higher time frame offers more support to a falling market and price range of higher time frame offers more resistance to a rising market.
View these levels as a 'range' rather than a single price point. Give a few points this side and that side to allow for the market noise.
All these resistance and support pressure points can be joined by trend lines, which when extended acts as pressure points of the future. These pressure points can also be identified by Pivot point calculation, Fibonacci levels, Quadrant lines, Gann angles, Gann fan, etc;
Study the graph given below.
Resistance and support levels appears like glass floors, where something invisible comes in the way of price action.