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SUPPORT AND RESISTANCE
among all the aspects of technical analysis, perhaps the most important concept is support and resistance . many other aspects of technical analysis are based on these concepts .hence before proceeding further , we first need to understand this concept thoroughly.
support and resistance are the important price points on the chart of any security at which the security is expected to attract the maximum amount of buying or selling.
they are the points where is a maximum probability of a pause or a reversal , of a prevailing trend . the logic behind them is demand and supply .
the price of any financial asset or security is driven due to the law of demand and supply . when the demand (buyers a) is more then the supply (sellers ) price of a security increases (buyers) price of a security decreases .
the age old saying of buy low and sell high is the only thing that is required to many in any financial market (stocks ,commodities ,currencies , cryptocurrencies, etc.) this is precisely where support and resistance come into the picture . for this , one has to either buy at support and later on sell at resistance or sell at resistance and buy back later at support .
most of the financial market traders use the concept of support and resistance as an important factor while trading in the market , be it scalping , day trading , swing trading or positional trading .
what is support ?
as the term suggests , it is the level at which the price of a security does not fall further as the demand is sufficient enough to hold the price from falling further .
as explained earlier , when supply is more then demand the price of a security decreases. Now as price reaches near the support level , more and more buyers get keen to buy the security whereby demand becomes more then supply and hence price stops from falling further and starts rising.
support will always appear or form below the current market price of a security .
support can either be in form of a single price level or a zone . this point shall be clear when you look at examples ahead in this chapter .
support level or zone ultimately gives us the reference point where the most repetitive buying (demand) has happened in the past and is likely to happen again in the future . it is an important technical level from market participants point of view .
how to plot support level or Zone ?
the following steps are to be followed to correctly plot the support level or zone .
01.look at the historical
02.identify extreme lows .
03.mark all the low touch points .
04.connect all the touch point .
01.look at the historical price data -the first think you need to do is to look at the past price data of a security whose support level you want to find .
you can either use a candlestick chart or an OHLC bar chart for this process. never use a line chart as it does not take into account open , high and low prices of a trading day .
I always prefer using candlestick charts, as they are the simplest of all forms of chart and provide all the necessary information .
02. identify extreme lows - try to find extreme lows i.e., price points or zones from where price of a security turns in an upward direction more often .
here price point refers to a particular point from where there has been a sharp reversal in price whereas the price zone refers to a zone in which a price gets stuck after a brief down move .
03. mark all the low touch points - when you are done identifying the extreme lows for support level then you have to mark or encircle these levels so that they become more visible and easy to understand . try to find at least 3 or more such points .
04 . connect all the touch point - once you are done marking all the touch points , next step is to connect all those points .
Now depending on the price action and time period of the data , these touch points will get connected through one or more horizontal lines or through one or more horizontal rectangular zones such that you either get a single support level , multiple support levels, a single support zone or multiple support zones as shown in examples below .
example 01 : ingle support level .
chart below shows a single support level drawn at Rs . 184 on the monthly chart of inox leisure historical data from 2013 to 2021..
example 02 : multiple support level
chart on the next page shows multiple support levels drawn on the daily chart of Dr. lala pathlabs Ltd usingg historical data from april 2020 to jan 2021.
example 03 :support zone
chart below shows a single support zone formed between 58 to 62 levels down on weekly chart of elgi equipment's Ltd taking historical data from may 2014 to July 2017
example 04 : multiple support zones
chart on the next page shows multiple support zones drawn on the weekly chart of titan company using historical data from June 2010 to march 2017.
what is the resistance
as the term suggests , it is the level at which the price of a security does not rise further as the supply is sufficient enough to hold the price from rising further.
as explained earlier , when demand is more then supply , the price of a security increases . now as the price reaches near the resistance level , more and more sellers get keen to sell the security whereby supply becomes more then demand and hence price stops from rising further and starts falling .
resistance will always appear or form above the currect market price of a security .
resistance can either be in form of a single price level or a zone . this point shall be clear when you look at example ahead in this chapter .
resistance level or zone ultimately gives us the reference point where the most repetitive selling (supply) has happened in the past and is likely to happen again in the future . it is an important technical level from market participants point of view .
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