In this article, you will get to know more about the concept of very crucial topic of trading called support and resistance. After learning the basics of trend lines in technical analysis, novice traders switch to technical topic of support and resistance. There are two basic terms in stock market, the support and resistance. These are the most talked about attributes of technical analysis in stock market. The support on a chart is horizontal line that stops the price of the stocks to fall. The support in the chart is also referred to as the “floor”. Likewise, the resistance can be explained as the horizontal line that stops the price of the stock to rise. The resistance in the chart is also referred to as the “ceiling”. However, these horizontal lines are nothing more than a decision line of the price of the stock.
As and when the prices falls down to the maximum then the traders assume it as buy orders because of cheap price of the stocks. The horizontal line touched by the price of the stock is said to be support. When the prices rise up to the maximum then the traders consider it as sell orders because of price rise.
The pattern seems like a bouncing ball, which is bouncing from the floor to the ceiling. You will observe that, the ball hits the floor and bounces and then it hits the ceiling and drops down. Support and resistance is like floor and ceiling with changeable stock prices in between.
Stock price on a chart acts as a floor by stopping the price from being pushed downward. Skill to recognize a stage of support can also agree with a superior buying opportunity as this is the spot where traders notice good value and thus start to push prices higher again
Support and resistance breakout
As soon as the breakout happens in the chart then resistance becomes support and support becomes resistance. The technical traders feel that the more support and resistance level is tested the better it is, as it creates more perplexity.
As soon as the orders will be filled, the breakout will take place.
How to identify support and resistance?
Trend lines can identify the support and resistance. Some of the traders use pivot point calculations to detect the support and resistance. When more and more traders test it, the level gains importance. When the price breaks out of support level then the support level turns into new resistance level. The resistance level turns into new support level, when the price breaks out the resistance level.
The Bottom Line
The future levels of support traders can significantly develop the returns of a short term investing strategy as it provides technical analysts the accurate scenario of what price levels should sustain the price of a given stock. However, predicting the level of resistance can be beneficial as this a price level, which could harm a long position strongly as it indicates high enthusiasm to sell the stock. In order to identify the support and resistance, there are many methods available.