Support and Resistance in Stock Market

The concept of Support and Resistance are two of the most important concepts considered in technical analysis. These terms are used by traders to refer to a zone or price level which acts as a barrier for the price of a security(stock) to go in a certain direction. One can expect more buyers than sellers at support and at resistance one can expect more sellers than buyers.

Support and Resistance can be used to identify the Target and Stoploss while trading. 

The Resistance

As the name suggests Resistance is a price level on charts that acts as a barrier and stops the price of a security from going above that price level. So the price is more likely to bounce back from this level rather than break through it.

Here we a chart of SBIN currently trading at ₹191.85. We can see that whenever the price of the stock reaches around the level of ₹200 there is a fall in price, we can conclude that the level of ₹200 is acting as a resistance and stopping the price from crossing this level. Now since the resistance level has been tested multiple times we can say that this is a major resistance. This happens because there are more number of sellers selling the stock at the level of ₹ 200.
Now the question is how is this helpful, one can earn money from this pattern in many ways. One way is to buy the stock at lower levels around 175 after a green candle is formed with volume and then putting your target a few points below 200 because 200 is the resistance level. Another way is to buy the stock if it breaks the barrier of 200, and keep the target according to your risk appetite. However, one should wait for confirmation and price to sustain above 200 before buying.

The Support

Having learnt about Resistance it will become very easy for you to understand the concept of Support. As the name tells us the Support is a price level that stops the price of a security from falling below that point. It provides support to the falling price. So the price is more likely to bounce back from this level rather than break through it and fall more.

Here we a chart of NAUKRI currently trading 782.30. We can see whenever the candles come near the price of 693 the number of buyers increases and the price jumps from there, we can conclude that the level of 693 is acting as support and stopping the price from crossing this level. Now since the support level has been tested multiple times we can say that this is a major support.

Using Support and Resistance

These concepts can be used to make a trading plan. We know that at resistance levels the price of the stocks bounces back, but will the price always bounce back?

The answer to this question comes from experience and what we have seen from the past trends that after testing the support and resistance multiple times (2-3 times) the stocks break the trend after 3rd or 4th time. It has been seen that if a stock breaks the resistance and it goes up then the previous resistance becomes the support. If a stock is to go up in future, it never goes straight up it travels in a zig-zag manner, it climbs 100 points retrace 30 points and then climb again making a high above the previous high. 

This is also used to check the major trend, if the new peak(high) is higher than the previous peak(high) then it is called to make a Higher High and is in an uptrend. However, it has been seen that when the upper resistance is broken there is an up move if the price sustains above the resistance but if the support is broken then there is a very strong down move because of fear. People get scared and start selling their stocks in large numbers that is the reason why the stock shows a bigger move when it breaks support than when it breaks the resistance.

How To Draw Support and Resistance 

To be able to draw these you just have to find the areas where the price is facing resistance multiple times and try to connect these in a straight line. The price doesn't always have to bounce back from that exact point, there are chances that the price might break the resistance but could not sustain that price so it will fall back again. One should always wait for confirmation and only enter the trade after reassurance.