In the Stock Market trading the most important part is to find the support and resistance level. Because the support and resistance levels are the base of all type of stock technical analysis.
The basic aim of any type of trade is to earn profit and to earn profit we have to buy at a lower price and sell at a higher price. That is the main principle of trading – Buy low and Sell high. To successfully perform this strategy we have to first identify how to buy low or when the price is available at a lower level or bottom level and when to sell or when the price is at its higher level or top level.
The support and resistance level typically indicate the top and bottom of any stock or indices like Nifty 50 or Bank Nifty and the demand and supply zone of the stock. That is the main importance of support and resistance level in technical analysis.
Top and Bottom of a Stock
First we have to know what is support and resistance in stock market. Resistance zones are usually previous top levels of that stock and support zones are previous bottom levels.
As a basic human psychology, traders always want to buy at the bottom and sell at the top. But in the stock market, no one could predict the actual top or bottom of any stock. Hence most of the traders assume the previous bottoms as lowest levels and previous tops as highest levels.
So when the share price touches its previous lows, then traders starts to buy that stock in a hope that the stock price may not go below it and a large number of buying starts for which the stock price bounce back.
Similarly when the share price reaches its previous high levels a large number of traders start booking profits as they think the stock price may not go above. For which selling increases in that stock and the price retrace from its highs.
This is the basic psychology of traders which is continuing for decades. Therefore technical analysts and traders always try to find actual support and resistance levels and use various tools, strategies, indicators, etc. to calculate them.
Demand & Supply Zone
Support and resistance levels are basically the demand and supply zones or known as the buying & selling zones. Support is that zone in which the demand increases and price moves up or may not go below that zone and resistance is that zone reaching which the supply increases and demand go down for which the price falls or may not go above that level for some time.
The basic rule of economics says: price always moves according to its demand and supply. When the demand for any goods or item increases the supplier fails to fulfill the demand and increases its price to mitigate supply shortage in the market and when demand decreases then sales also decreases and supply increases for which the price falls.
What is Support and Resistance
Support is the point where price fall takes a pause and may not fall below it. As the price is at a lower level, the valuation looks attractive to the traders or the investors, and the demand or buying interest for that stock increases for which price doesn’t fall more, hence it is known as the demand zone. If the buying interest increases significantly then the price may start uptrend from here.
Resistance is that point where the rising price takes a break and faces difficulties to go above. As the price is at a higher level, Traders start to book profit, and selling increases for which supply increases. And due to selling pressure, the price doesn’t increase or may start falling from this level.
Breakout in Support & Resistance
When the price cross above the resistance zone it is called breakout and when it crosses below the support zone it is called breakdown. Sometimes the price breakout (or breakdown) could not sustain for a long time and the price returns to its previous zone again. This is called a false breakout. When price breakout happens with good volume, strength, and momentum, then the price trend may not reverse within a short time and it could be called a decisive breakout. To check this, analysts look for a strong breakout candle in the price chart with higher or more than average volume and RSI above 40 levels, to assume it as a decisive breakout.
Next Support and Resistance Levels
Once the price cross over a resistance level then that level act as the next support level and if the price goes below its support level then it acts as its next resistance level. The basic reason behind this principle is once it breaks a hurdle or difficult level decisively, it will not be easy to reverse cross it again within a short term. Hence breakouts are considered as the beginning of a new trend.
Buy & Sell signals
Support & Resistance levels help to make buying and selling decisions or give buy & sell signals, which is the basic objective of all types of trading strategies.
Support and Resistance indicator
Then the question arises how do you calculate support and resistance of a stock? So let’s take an overview of some basic tools and indicators which help us to find support and resistance level. You can read more about these tools & indicators in separate articles specifically describing use and functions of them.
- Trend Line
- Channel
- Moving Average
- Pivot Point
Trend line
Trend lines are basically straight lines connecting more than two points either tops or bottoms of the chart. This could act as the price Support & Resistance levels.
Channel
Channels are two parallel trend lines. When price moves within a channel in a zigzag manner, the upper line of the channel works as resistance and the lower line act as support.
Moving Average
Moving Averages are lines connecting average price points which act as significant Support & Resistance levels. To read more about moving averages check this article here.
Pivot Point
Pivot Points are mathematically & scientifically calculated Support & Resistance levels. You can add Pivot Points on the chart from the ‘Studies’ menu.
Stock support and resistance website and app
You can easily find support and resistance level of any stock using the above tools and indicators on chart. Basically most of the stock broker’s mobile trading app and website or web platform gives access to all these tools in chart. We mostly prefer and personally use Zerodha and Upstox because of their fast & easy to use mobile app and web platform for charts and trading.
In case you want easy and readymade support and resistance level of any stock or indices then you can use Moneycontrol app or website, the most popular finance news and analysis app in India. It provides support and resistance of stocks and indices in shape of R1 R2 R3 (which indicates Resistance1, Resistance2 & Resistance3) and S1 S2 S3 (indicates Support1, Support2 & Support3). Here you can find the support and resistance level of Nifty 50 & Bank Nifty for the next day, which helps traders to take positions mostly for day trading and Futures & Options trading(FnO). You can read our article “Best mobile app for Stock news & analysis in India” for more information about various mobile apps preferably used by stock traders and investors in Indian stock market.
Conclusion
This is a short description of Support & Resistance, as you would make a deeper analysis, you will find more descriptive concepts. We have tried to keep the article short, simple, and easily understandable mostly for beginners in the stock markets. If you find this article helpful please share it with your friends who are interested in stock markets. And thanks again for visiting our page.
