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What is support and Resistance

What is support and Resistance ?

Support and resistance are key concepts in technical analysis, used by traders to identify price levels on charts where the probabilities favor a pause or reversal of a prevailing trend.

Definition of support: A support level is a price level where a downtrend can be expected to pause due to a concentration of demand. As the price of an asset drops, demand for the shares increases, forming the support line.


Characteristics: 

-Represents a price level where buying interest is strong enough to overcome selling pressure.

-Often identified with previous lows on the chart.

- A support level can turn into a resistance level if the price breaks below it.

Definition of Resistance: A resistance level is a price level where an uptrend can be expected to pause due to a concentration of supply. As the price of an asset rises, selling interest increases, forming the resistance line.


-Characteristics:

-Represents a price level where selling interest is strong enough to overcome buying pressure.

-Often identified with previous highs on the chart.

-A resistance level can turn into a support level if the price breaks above it.

 Use of Support and Resistance

-Identifying Entry and Exit Points: Traders look for buy signals at support levels and sell signals at resistance levels.

-Setting Stop-Loss Orders: Stops are often placed just below support levels or just above resistance levels to limit potential losses.

-Trend Reversals and Continuation: The breaking of a support or resistance level can signal a trend reversal or continuation, offering potential trade opportunities.

 Example

- If a stock has been consistently bouncing back up when it reaches ₹ 500, then ₹500 is considered a support level.

- Conversely, if a stock struggles to rise above ₹1000, then ₹1000 is considered a resistance level.

Understanding these concepts can help traders make more informed decisions based on historical price behavior.

Support and resistance levels can be categorized into several types based on how they are formed and used in technical analysis. Here are some of the main types:

 Horizontal Support and Resistance

-Description: These are levels drawn at a horizontal line where the price has consistently stopped and reversed.

-Characteristics: They are easy to identify and often represent psychological levels (like round numbers).

Trendline Support and Resistance

-Description: These levels are formed by connecting higher lows in an uptrend (support) or lower highs in a downtrend (resistance).

-Characteristics: They help traders identify the overall direction of the market and potential reversal points.




Moving Averages

-Description: Moving averages can act as dynamic support or resistance levels.

-Characteristics: Commonly used moving averages include the 50-day, 100-day, and 200-day averages. Prices often bounce off these averages during trends.

Fibonacci Retracement Levels

-Description: These are horizontal lines that indicate potential support and resistance levels based on Fibonacci numbers.

-Characteristics: Common retracement levels are 23.6%, 38.2%, 50%, 61.8%, and 76.4%. They are used to predict areas of price retracement or continuation. Among above all retracement levels, 38.2% & 61.8% are strong support/resistance. 

Click Here for More Details on Fibonacci

Volume-Based Support and Resistance

-Description: Levels are determined by analyzing volume at various price points.

-Characteristics: High volume at a certain price level can indicate strong support or resistance.

Examples of Support and Resistance Levels

1.Horizontal Support: A stock consistently finds buying interest at ₹500, forming a horizontal support level.

2.Trendline Resistances: A stock in a downtrend consistently turns lower upon reaching a descending trendline.

3. 20-Day Moving Average: During an uptrend, a stock finds support at its 20-day moving average, indicating a continuation of the trend. 20 day moving average is the strongest support/ resistance line that can be used in all Daily/ Weekly/Monthly timeframe for long or short trade. It can be used in daily time-frame for short-term, in weekly-time frame for medium term and monthly for long term trend.

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