Understand what are Supports and Resistances: one among the foremost elementary concepts while trading in stocks that each trader should know is, “Supports and Resistances”. If you’re already involved within the market, you would possibly have heard or read terms like “Nifty50 possesses an enormous resistance at 10,800 points” or “Stock XYZ features a support line at Rs 105”.
In this article, we are getting to discuss what are supports and resistance, their characteristics, and the way exactly to use them. By the top of this text, you’ll have an honest idea about these concepts and use them in your trading. Let’s start.
What are Supports and Resistances?
The Synonym for the word support is “Reinforce”. Basically, support is often said to be some extent of reinforcement. In other words, supports are those points which act as a barrier for the costs, once they start to return down. they will even be said as points, where the downtrend is predicted to be paused. and that we should see a replacement surge in buying and demand.
On the opposite hand, Resistances are said to be the purpose where the availability increases or the longs start getting out of their positions from the market. Therefore, if we were to carefully analyze, supports and resistances are often said because the point of friction or tussle between buyers and sellers.
Now, once the extent of Supports and Resistances (S&R) are identified, they become the purpose of entry or exit for the trade. the costs either recover or correct back, from S&R level or breach these levels and attend subsequent S&R.
Characteristics of Resistances
• Resistances are the amount that are defended by sellers. and therefore the market finds it difficult to travel beyond that level. it’s a tussle point between buyers and sellers.
• Maximum selling pressure comes from sellers at now and even the buyers start to exit their long positions at these levels.
• If the amount of Resistance are breached within the market, we could see a huge trading within the market, up to next resistance levels.
• Resistances also can be called as points where fresh short positions are often initiated within the market, with good risk to reward ratio.
— Understanding Resistances with an Example
The Share price of Airtel Limited had made a replacement high within the year 2007 and then, the market had corrected nearly 50% from its highs. Then again, the market made a move up and went up till near 500 levels and began correcting again. And by joining these two points, of the initial high and therefore the recent high, we could form a line.
So, now this line forms a crucial resistance within the market. As and when the market made a move up, this line acted as a crucial barrier and therefore the market began to correct back. and therefore the market was ready to breach this resistance in Mid-2014 and therefore the share price had a huge trading. and therefore the market made a move till the initial swing highs of 570 levels. Therefore, this is often the facility of Resistances, when a crucial level is breached.
Now, allow us to understand the concept of swing trades. If we glance at Figure 2, we’ve marked swing trade. Swing trades are those trades that we hold for an extended duration of your time, usually for the completion of 1 full cycle. These are the trades that have an extended holding period. and that we generally don’t have a profit target in situ, we just keep trailing the Stop losses and ride the wave.