The technical analysis uses various tools to predict the current and future price movements of the stocks of which support and resistance levels are the two fundamental elements. The investors and traders already having experience in the swampy stock market must have heard of terms like, “Nifty will find support at 10,000 and resistance will be at 10,500 levels”. These are the day-to-day terminologies rolling down the streets of the stock market, but beginners find hard to make heads or tails out of such terms.
Moreover, previously we have discussed the concept of the candlestick chart pattern, where we learned about the entry and stop-loss points. Today we’ll discuss the price points that are best inferred through the support and resistance levels.
A Snapshot of Support and Resistance Level
Trading, in general, extensively uses the concept of support and resistance level. These are the levels to which price has reacted in the past. It exhibits the features of a boomerang where just as you throw the curved flat piece (boomerang), it comes back to the thrower. The price behaves in a similar fashion and seldom comes back to the original point with the only difference of an interchange between the support and resistance price levels.
Further, demand and supply are the key factors that influence the two indicators. Let’s have a brief insight into the two significant tools of technical analysis.
It is a point where the slump in the prices comes to a halt and new weather of a price plunge sets in. The demand increases after the price of the stock touch the support level. Therefore, at the support level, the buyers are more powerful than the sellers in the market. Also, it gives an indication to buy a stock as after the price reaches its lowest level, it is most likely to bounce back.
It is a point where the surge in price comes to a stoppage, and subsequently, a new trend gets reflected with the flop in price. It is a position where the sellers are robust than the buyers, as the value of the stocks doesn’t rise further after reaching the point of resistance. The resistance level hints the investors of selling the stock.
Erstwhile, as you have begun to see the daylight, we can move forward to determine the entry and exit points of stocks.
When to Take Position in the Stock Market
The investors need to identify the area of the support and resistance level in the candlestick chart pattern to identify the entry and exit points. Support level signifies that a downtrend will end, and a further dribble in price is averted. The investors should purchase the stocks when it moves above the mark of support price. This situation act as a suitable entry point for the investors as the prices of the stock start gliding in the upward direction after touching the support level.
Moreover, the investors should look for the stocks with a moderate price drop in a short duration, must examine the trend lines, and analyse the trading volume of the stock in the market.
The trend line represents the support and resistance level with the manifestation of the current direction of change. Besides, it is a line that stops the price from falling further. The investors should perform a detailed examination of a price reversal trend. The price must face rejections several times, and if the floor holds up, it confers a support trend line that acts as a booming entry point to add value.
On the other hand, volume exhibits the absolute number of shares traded. The rising prices, along with the increasing trading volume, upholds a bullish trend.
When to Exit from the Position in the Stock Market
Imagine being on a trip with friends that you don’t wish for coming to an end, but when everyone is returning home, you don’t want to be the last person to be left on the bus. In the same way, when the traders hold a winning position, he gets glued to the set point. But, in order to avoid losses, he should plan a good exit position, so that he doesn’t miss on the opportunity of exiting the stock when it reaches its highest price for the day.
The traders should immediately exit from the position when the stock approaches the resistance level to support the strategy of buying at a low and selling when the price reaches high.
Let’s take a hypothetical example for elucidating the exit and entry point by considering the resistance and support level respectively for twelve months of an XYZ company, where the stock price ranges between ₹7 to ₹15 per share. On the first month of trading, the stock price closed at ₹15, but after three months, it dropped to ₹7. Further, the stock price reached the ₹15 level and then later declined to ₹7.
During the last months, the stock price again reaches the ₹15 price before touching the ₹7 price level. The price moves within the band of ₹ 7 to ₹15 per share. If the price shows a pattern of not moving outside a support and resistance level, resistance gets fixed at ₹15. It manifests the right time to sell the stocks when it touches the resistance level of ₹15 as the market prices slide down after reaching the ₹15 marks.
Similarly, the support level gets fixed at ₹7 price level, which indicates an entry point for the traders, as the share price will increase after reaching the support level or will bounce back.
The traders should play the game of trading after learning its rules of expressly knowing when to buy and when to sell the stocks. The support and resistance level gives a prototypical guideline to purchase when the price touches the support level and sell the stock immediately after it reaches the resistance level. The traders, by following the simple rule of thumb can grab the opportunities put forward in the market.
If you want to know more about Support & Resistance Level, check out the YouTube video on Choice Broking channel where our research analyst explains this in greater detail.