Everything You Need to Know About Support and Resistance
Support and resistance at the trading level are considered to be two of the most essential and talked-about aspects of technical analysis. Market analysts and investors use them to determine the movements of a particular stock so that you can make informed buying and selling decisions.
This article will tell you everything you need to know about these concepts as well as how support and resistance indicators work.
To give you an overview, the terms are used while evaluating chart patterns to refer to price points that, once reached, push a stock to start moving in the opposite direction.
What is Support?
The support level is when market demand is high enough to prevent stock prices from dropping below the point. Every time the price of a stock approaches the support line, it’s seldom able to penetrate any further as the demand is at its highest. In simple words, support is when the price of a stock cannot fall anymore. As a result, traders can expect maximum buying demand at this line, along with the fact that prices are likely to go up again.
What is Resistance?
Now that you know the basics of support, grasping the concept of resistance will be easier and more intuitive. In diametric opposition to the support line, the resistance level is when stock prices cannot move higher as market supply hits the ceiling.
When traders and participants see that prices are approaching resistance, they tend to start selling more and buying less. Therefore, you can anticipate a lot more sellers in the marketplace than buyers. As a result, the support line invariably lies below the current market price of a stock, while the resistance line lies above.
The support and resistance levels are tantamount to determining three essential features while trading: the market’s direction, buy or sell timing, and establishing your stop loss.
How do Traders Use Support and Resistance for Trading?
Reading into the support and resistance levels is a common strategy among traders, typically used in sync with other techniques. Here are the top 3 strategies you can apply with the help of support and resistance:
- Breakout Strategy
As unpredictable as the market tends to be, it does follow a discernible pattern that allows traders to devise and execute certain strategies. For instance, it often happens that a period of uncertainty regarding the direction of a stock is succeeded by the price breaking out and trending. It is during such breakout periods, when momentum is moving in a single direction, that traders capitalise on the opportunity and either start buying or selling, often paving the way for a new trend.
However, to avoid the consequences of a false breakout, traders wait for the prices to pull back to support or resistance levels before deciding whether to buy or sell. Breakout trading is, therefore, a method of momentum trading that instructs traders to trade at the peak point where the breakout is expected to occur. The idea is to be swift, aggressive, and decisive.
- Range Trading
If the market is evading clear movement in any one direction, it’s difficult to predict where it will go. That’s when range trading comes into play. A trading range is defined by two levels or prices between which the market moves at a sustained pace for a specific period of time.
This type of trading essentially occurs between the support and resistance lines. Traders are prone to going long when the price touches the support area and short when it enters resistance territory. However, since the market does not always confine itself to the room between support and resistance, traders should set their stops below support when making long trades and above resistance during short ones.
- Trendline Strategy
Trend lines are popular and versatile trading tools that can be effectively used for swing trading day, and position trading. Unlike the support and resistance lines, which are horizontal and parallel to each other, a trend line is diagonal and slopes upwards or down.
Traders can draw this line themselves by connecting two or more low points through an upwards trend or two or more low points during a downtrend. The best way to go about this is to look for entry points in the direction of the trend to increase your chances of a successful trade.
To Sum It Up
Support and resistance levels can be super-dynamic, so if you are using the concepts as trading strategies, you will need to make quick decisions on your feet. Of course, this takes time and practice, and you might not see immediate results in your favour. However, as you continue to participate, try to identify trends and ranges along with various chart patterns while establishing targets and stop-losses each time using a demo account. Once you start making consistent profits and are more confident about the technique, you can try trading with money and achieve your financial goals.
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Frequently Asked Questions
Support and resistance levels are helpful for traders as they indicate when to buy or sell based on whether a stock has reached its highest or lowest point. This determines the overall trend of the market, which will either lean heavily towards buying or selling.
Yes, these levels are important indicators for any traders, notwithstanding the timelines of trades. The one major difference between long and short-term trades, however, is that the long-term ones tend to hold and be more reliable. For example, short-term charts with one-minute candles on the support line can change within hours, as opposed to monthly candles that require months to form and break.