What is Support and Resistance in stock Market

What is Support and Resistance in Stock Market

Navigating the stock market can be both exhilarating and overwhelming, especially for those new to investing. To succeed, one must grasp a multitude of concepts, and among them, understanding support and resistance levels is paramount. Support and resistance levels are fundamental technical analysis tools that provide insights into a stock's potential price movements. In this blog, we will delve into the significance of these levels and how they can be used to make informed investment decisions.

 

When you think about stock markets, it is the first thing to find support and resistance, these are very important levels for trading.

 

No trader can trade without marking support and resistance, it plays a big role in their trading, support, and resistance indicate how far the price of a stock can go without hurdle.

 

In this blog, I am going to tell you how to draw support and resistance, what kinds of support and resistance, and how to trade on the basis of them.

 

A support level can be drawn up on a monthly, weekly, daily, hourly, or minutes chart.

 

Firstly, we should know what is the support level of stock.

 

Why Support and Resistance Matter

Support and resistance levels are crucial because they provide valuable information to Traders and investors:

Price Prediction: By identifying historical support and resistance levels, analysts can predict where a stock's price might stall or reverse direction. This information can be used to determine entry and exit points for trades.

Trend Confirmation: Breakouts or breakdowns above or below support and resistance levels can confirm the continuation or reversal of trends, respectively. These price movements offer insights into the overall market sentiment.

Risk Management: Knowing where support levels are can help investors set stop-loss orders—a predetermined price at which they will sell a stock to limit potential losses.

Market Psychology: Support and resistance levels are often psychological levels where traders make decisions. A stock that consistently fails to break through a resistance level may create a perception that the price is "overvalued."

 

1.  What is the Support Level of a stock

Support is a level of a stock where the price can consolidate for few times, it is seen in the market when the price of a stock regressively declines and at some point in time price gets consolidated in a range or on a level takes the support of that level or area or It can be a turning point or a pivot in the market, where demand starts generating by the bulls, where people are interested in buying. It is always below the current market price.

Support can be different types like a straight line, a trend line, an area, or it can be rounding figure.

 Support Level: Imagine a stock's price as a ball bouncing on a floor. The support level is like that floor—it's a price point at which a stock tends to stop falling and may even rebound. This level is formed when there is enough buying activity to counteract the downward pressure on the stock's price.

Daily Support Area in TATA CONSULTANCY SERVICE LIMITED

In the above chart of TCS Ltd. We can see there is a pivot or turning point of a price after a sharp fall in a price then the price moved upward from that point after that price has come again in that range and after touching that level price moved upward again.

 

Trendline Support in BHARAT FORGE

As you all can see here price is taking support of a trendline, People trade on the basis of trend line (trendline breakouts). It’s a famous trading style followed by many traders in their trading journey.

 

EMA’s SUPPORT

Exponential Moving Average (EMA) is another best tool for support and resistance in the market, in the above chart you can see price has touched EMA several times and took support from there, so it is also a kind of support in the market.

 

PSYCHOLOGICAL SUPPORT (ROUNDING FIGURE)

In the stock market, there is another support which is a rounding figure like in 100s, 1000s, or 10,000s.

These are psychological support levels that are created by human sentiments in the market.

2. What is the Resistance Level of a Stock

Resistance is a level of stock where price consolidates and Supply gets generated, at this resistance level suppliers gets active there, and they try to create short positions, they are the bears of the market. Here people are interested in selling.

Resistance Level: On the flip side, the resistance level is like a ceiling for the stock's price. It's a point at which the stock tends to stop rising and might even decline. A resistance level forms due to increased selling activity when the price nears a certain point.

At the resistance level after the reaction price starts falling, resistance is always above the current market price. It can be drawn up on monthly, weekly, daily, hourly, or minutes chart. Resistance level helps to identify how far a price can go without any hurdle.

Like support, there are also many kinds of Resistance.

Resistance Area in Wipro Ltd in Daily Time Frame Chart

Here Area marked is a resistance Level in Wipro Ltd. Their price reacted three times, the price has touched resistance, and gets declined after it.

Resistance Line in STATE BANK OF INDIA

In this case as you see here Trend Line reacted as Resistance level in market 

Conclusion

Support and resistance levels are essential tools in a trader's arsenal. They provide insights into a stock's potential price movements, confirm trends, and aid in risk management. While they're not infallible predictions, understanding these levels can empower investors to make more informed decisions in the dynamic and unpredictable world of the stock market. As with any trading tool, it's important to remember that combining technical analysis with fundamental research is the key to making well-rounded investment choices.