Support and resistance indicators are essential concepts in the technical analysis used to identify key levels on a price chart. These levels help traders and investors decide about buying, selling, or holding a particular security.
What Is Support?
Support is a price level where the demand for a Stock is strong enough to prevent it from falling further. It acts as a floor for the price, creating a barrier that prevents it from declining. Traders often observe support levels to identify potential buying opportunities, as prices are expected to bounce back from these levels.
What is Resistance?
Resistance, on the other hand, is a price level where the supply of a Stock is strong enough to prevent it from rising further. It acts as a ceiling for the price, creating a barrier that prevents it from moving higher. Traders monitor resistance levels to identify potential selling opportunities, as prices are expected to reverse and decline from these levels.
How To Find Support and Resistance?
Support and resistance levels can be identified using various methods, including trendlines, horizontal lines, moving averages, or chart patterns. These levels are often considered significant because they represent areas where supply and demand are in balance, leading to potential shifts in price direction.
To Find Support and Resistance levels on a price chart, you need to look for the history of a price movement for a particular stock, the history could last 1 day, last 1 week, or last month, intraday traders look at history based on time frame chart like 15 minutes, 30 minutes.
While looking at the price history, you need to see when the price was moving down and then at which level it bounced and went up, the point from where the price bounced is the level of Support. Later when the price decline again buyers wait for this Support level, once the price close or touches the same Support level, traders place their buy entry.
Similarly as above, for Resistance, you need to see when the price was moving up and then at which level it went down, the point from where the price declined is the level of Resistance. Later when the price moves up again sellers wait for this Resistance level, once the price close or touches the same Resistance level, traders place their sell entry.
To demonstrate the above information, please look at the below picture of the 15-minute price chart for stock HINDUSTAN UNILEVER.
Support and Resistance Switch.
Support and resistance levels can also switch roles. Once a resistance level is broken, it often becomes a new support level, and vice versa. This phenomenon is known as the support-resistance flip.
Support and Resistance Key Point.
It’s important to note that support and resistance levels are not precise points but rather zones or areas on a price chart. Prices may temporarily breach these levels before reverting back or continue moving through them. Traders use other technical analysis tools and indicators to confirm the validity of these levels and assess the strength of the support or resistance.
Support and Resistance levels play a crucial role in technical analysis as they help traders identify potential buying and selling opportunities. By recognizing these key levels on a price chart, traders can make informed decisions and manage risk effectively.