Support and Resistance


 



At times you might have seen me or someone else giving you targets or stop loss. With this very post you will learn how they do it because you are just about to learn one of the most important concept used by technical analysts, the concept of support and resistance.

Having learnt the concepts of charting and trend in our prior posts, this point is just perfect to introduce ourself to support and resistance. Here, we go...

Support- 

Oxford Dictionary defines support as something which "bears all or part of the weight of, hold up". Applying the same definition to our field we can interpret it as something which hold up the price levels. To be precise and to the point, support is that point on the chart from which the price starts dropping further and bounce back upwards.

Resistance-

While Support is that point from which the price bounce upwards, resistance is that point from which the stock bounce downwards and starts correcting. It is the point which stops stock from moving upwards further.

 Following chart will help you understand the actual significance of support levels;


In the above chart we see every time the price 40 levels it bounce upwards. So, its our support levels and on the upper side every time it tests 110 levels it starts coming downwards so that is our resistance levels. You will find such range bound movement in many stock. To be profitable all you need to do is to buy near the support and sell near the resistance.

Following is chart of Hindustan Zinc have a look at it:


As we can see every time the stock tests 152 levels it bounce upwards and approaches upwards. So, here 152 is our support. While on the upper side we have two resistance, the points from which it starts falling downwards 177 and 183 as labelled in the charts.

While trading support and resistanc, it is advisable to keep stop losses slightly under the support levels so in case a stock breaks down the support levels or is unable to hold the support, you are sold out as breakdown from support is a bearish sign, which we will be learning later in this post.

Another example of support and resistance:


In above examples we saw support and resistances in stock moving sideways let's see support and resistances in uptrend and down trend

In an uptrend both the support and resistance keep shifting upwards while in a down trend the support and resistances keep shifting downwards as can be seen from the following figure which explains support and resistance under both cases in a single diagram:


We can use support and resistances for choosing an ideal entries or exits in case of uptrend and downtrends.


Following figure shows real life example of support and resistance in an uptrend:


Example of Support and Resistance in a Downtrend:



Trend Confirmation using support and resistance: 

If the stock breaks resistance on upper side it is a very bullish sign and usually there is one pull back towards the point of resistance that is the perfect point to enter. As can be seen from the following chart:



While the breakdown from support levels is a bearish sign and if your stock breaks down, the better choice would to exit from your longs and go short. Here are the examples of breakdown:



Support becoming Resistance and Vice-versa:

At times old supports acts as resistance and old resistance can act as support. Following are few examples explaining it:


Example of resistance becoming new support:



Psychology of Support and Resistance:

This is not something magical playing over charts, as already told charts depict behaviour of the masses. Resistance is created due to the fact that majority of the people believe that at that particular levels the stock is overpriced or the stock doesn't deserve that price so every time the stock reaches those levels majority of the traders sell the stock and book profits, this lead the stock to slip downwards and hence resistance is formed on the charts.

On the other hand, in case of support investors feel a particular point to be ideal entry point or the fair value of the stock so every time the stock tests those levels investors buy that stock, this take the price to higher levels and is seen on the charts in form of support levels.

Your Homework:

I hope I was clear on the topic, but as you are reading it for the first time you might face a some issues in which I am going to help you. As a homework you can try determining the support and resistance of the stocks you are holding right now. If you face any problems in the process you can ask the same in the comments, in our blog community or at our Facebook Group, I will be more than happy to clear all your doubts.

Earlier in this Series:

Dow Theory

Happy Investing
The Stock King

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16 comments

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priya
AUTHOR
February 15, 2015 at 3:55 PM delete

so abhi bro, when a stock gives breakout on upperside ,we have to wait till it pullback to its old resistance and then we have to enter.i wrongly entered many stocks atonce it gives breakout.thanks for all lessons.

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February 15, 2015 at 4:06 PM delete

exactly mam............................... keep learning keep earning

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Amrit Rathi
AUTHOR
February 16, 2015 at 1:04 AM delete

generally how many days chart are taken into account to see the support or resistance

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February 16, 2015 at 7:40 AM delete

broo that will depend on the time period you are planning to hold your stock if you are looking for short term you will check immediate support and resistance if you are planning to give it some time you may check the second supports and resistance for a better view i recommend using 9 months charts...................... regards

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Sagar Bathini
AUTHOR
February 17, 2015 at 12:12 PM delete

Thank you brother,

I have a query.?

1.How you draw that two parallel lines.
2.in the last graph where you explained about resistance becoming new support, why there is a downfall even though it broke resistance. Why shouldn't I enter immediately when there was a pull back.? which happened after 7 days.? is there any time constraint.??

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February 17, 2015 at 12:29 PM delete

for your first query with respect to drawing parallel lines, you can do it with the tools provided in charting softwares and websites which we explained in case of our post introduction to charting, in chartink.com website above the charts on left side u will find tools to draw lines, u can draw two lines one above other to get parallel lines.............. if the lines u get are not exactly parallel for ur stock then u need not woory those are falling channels which we will learn in our upcoming posts.

For ur second query with respect to resistance becoming new support i want to tell u after a breakout two things can happen first the stock will continue to move upwards and don't come down for the pull back..................... or come downwards for a pullback however in around 90% of the cases there will b a pull back so ur ideal strategy should to buy 50% of ur planned purchase immediately after breakout and buy another 50% in pullback if it happens........

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Sagar Bathini
AUTHOR
February 18, 2015 at 11:52 AM delete

But it in last chart, there is a fall after the pull back right.?? I am asking you since it took 7 sessions for the pull back(When there is all time high), so there is a failure about our prediction.??

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February 18, 2015 at 6:48 PM delete

there is no failure in our prediction, the chart in incoplete it will move high upwards after these moves................

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February 22, 2015 at 5:40 PM delete

I studied escorts have a resistance at @ 168 and a strong support @ 137 please correct if anything wrong

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February 22, 2015 at 6:09 PM delete

bro the support has to be below current market price.................... and it is the immediate point from which the price reversed to move upwards and reistance is that point from which the price start moving downwards in case of escorts the support is at 120 and resistance is at 138. Please go through the artlcie once again. Regards

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nakulvibhor
AUTHOR
August 10, 2015 at 4:24 AM delete

I want to go long term..generlly 1yr and more but unable to decide support and resstnce as those charts dnt form any particular pattrn.. Thn how to decde..plz elaborte ..
Thnx

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August 10, 2015 at 11:14 PM delete

for long term investing buy fundamentally strong stocks at support levels................. and hold for the time period u wish

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Surjit Nimesh
AUTHOR
June 3, 2017 at 8:46 PM delete

I understand what is support and resistance. I can even see these things in a chart. But what tools do I use to find resistance and support. (Like sma, RSI, William, ossilator etc.)

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Anonymous
AUTHOR
June 16, 2017 at 9:53 PM delete

Wow....Excellent explanation, thanks Abhi!!! Cheers!

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