Whether you are intraday trader, short/long term investor, you like trading options & futures or even if you trade in currency or commodities, without knowing about support and resistance you can’t trade or invest at all.
Support and resistance is the foremost technical indicator, which helps you to tell the direction or movement of any securities. If you want to do better and more accurate technical analysis of your trade, support and resistance levels is an essential ingredient to it.
I will not only going to discuss how to find support and resistance levels on chart for a stocks, nifty or any other indices but the whole mechanism & psychology behind it. Whether you are a beginner, mediator or advanced, this research will surely going to give you another perspective going forward.
However, we will learn it step by step and you can implement this in your future trades. This will be going to be a long post so have a little patience, don’t just read it but try to understand the deeper science behind S&R.
Note: Most of the technical analysis is based on this perspective i.e. “History tends to repeat itself”. Hence, most of the tools or indicators gather the previous data and make you aware about the future price movements.
What is Support?
In a very simple terms support means to hold up something, so that it does not fall further. In the world of trading and investing support is a tool to find a point or a level on a chart that prevents the price of a stock/index from falling further. Surprisingly, you will find most of the buying activities here.
Support is the level at which the demand is powerful enough to stop the stock/index from falling any further. Whenever the price falls to the support point, it is expected to bounce back.
The rationale behind any stocks to bounce back is the demand due to falling of share price. It’s a very common logic people often use, even buying normal things in life. If you can get 10% discount, instead of full price, people feel its worth buying, thinking maybe I won’t get this at those prices in future.
However it may happen the thing you have bought may be available at much discount tomorrow.
One thing to keep in mind, you will find support level always below the current market price. So whether you are trading stocks, or any index, you will find the support level below its current price. Let me show you how stocks behave when the touch support level.
Above chart is of SBI, I have taken a long term view so using 1 year chart, for short trend one can use 3-6 month and for intraday use hourly or day chart. From left i have drawn an circle to mark the price, its in range of Rs.244 to Rs247.
The second circle range is Rs. 246 to Rs.251 and the third is the most recent hit happened due to worldwide pandemic coronavirus, the stock hit a sharp low.
However can you imagine, it still followed the support points and have bounced back from rs. 181 to Rs.240. See, the levels can only be made in a range in long term view and even on intraday charts too you have to keep a range of at-least 2 rupees from current support.
The support level created within a period of one year was so strong that even in a pandemic situation, SBI stock tried to bounce back and touch those levels. We will discuss how you can use S&R while trading or investing in stock market further, but let us first quickly understand the resistance.
What Is Resistance?
I was a PCM student, have studied resistance in physics when i was in school. But that was related to the flow of current in a series & measured in units of ohm. When i was first came to know about the resistance in trading and investing, i got more interested.
See, resistance is just opposite of support. As the word itself says to resist or stop something. Resistance level on a chart depicts a level where the rising price of a stock/index will be halted.
The reason for any stock to move downward from it resistance level is due to heavy sell-off at rising price.
When stock rises people who have bought it lower will sell, and the demand of buying gets reduced due to high price. The resistance level is always above the current market price.
So, now you know the basic of resistance, let us look this in chart and see if this hold true or not and this time i am using a intraday 30 minutes chart of 1 month duration to check.
This AXISBANK chart is very exciting to watch, it’s just 1 month chart, as you can see the first support got created nearby Rs.401, it started rallying, than after 2 weeks it again touches the same support level and rallied again, however on 5, may,2020, the candle open in morning 9:15 touching the intraday resistance of rs.418, but not able to sustain, due to heavy sell-off , it broke the support level and now trading below the levels of Rs.400.
This is how resistance and support works together to give you signals when to enter or exit your trade.
Now, before we discuss the support and resistance in totality, let us know a little about pivot points.
What is pivot point?
A pivot point is a technical analysis tool, or indicator you will be using while knowing the levels of S&R on chart. Pivot point is a calculations, which guide you to know the overall trend of the market over different time zones.
Pivot points gets calculated by averaging high, low and closing prices from the previous trading day.
If a stock/index is trading above the pivot point, the overall sentiments remains bullish(buy), on the other hand if it trading below PP this indicates bearish(short) sentiment.
What Is Pivot Points Formula?
The above formula is just for making reference, you do not need to calculate it manually, there is no need. The pivot point indicator can be added to a chart, and the levels will automatically be calculated and shown on chart. Just need to search the indicator, pivot points and apply.
Pivot point is one of the greatest technical indicator you can use to plan out your intraday trades in any segment (equity, Fno, commodity etc.).
Below image tells you how pivot point looks on chart when applied:
How To Do Intraday Trading With Support & Resistance?
We discussed above in detail about the support, resistance & pivot points. We learned to make new positions for long and short term trades but what about intraday trades? Now we will see how this gets applied on intraday charts for stocks and indexes and how you can trade observing patterns.
Whether you a are a beginner or have little knowledge, without using this tool, you cannot trade with perfection. This is a must know tool that you will be using on every trades.
Once you find or identify support or resistance zone, those price levels can serve as potential entry or exit points because for your trade. Because when price reaches a point of support or resistance, it will do one of two things:
- Bounce back away from the support or resistance level
- Violate the price level and continue in its direction—until it hits the next support or resistance level.
How To Trade Stocks/Indexes through Support & Resistance?
Before I begin to explain you on how to trade stocks & different indexes (like nifty, bank nifty) while using SR You have to keep in mind the overall market sentiments as well, if trading a particular stock , or global market when trading indexes like Nifty.
The logic is, if the overall market is positive than stock resistance easily gets broken, and if a stock is falling than the support levels becomes more stronger.
On the contrary if the overall market is negative, even if a stock touches the resistance level chances of hitting high is less, and the support zones become weaker, if stock fall. Similarly you can take a cue for indexes like nifty from global market, how they have closed on the previous days.
How to Trade Stocks with Support & Resistance?
My personal advice would be to never try to jump as soon as the market open, hold your horses and do some analysis. Open the chart of the stock you want to trade, now apply the Pivot point tool checkout the resistance and support level and see where the stock is currently trading.
Meanwhile also check the overall market sentiments as explained above.
Below is the price quote and chart of HDFC Bank, on 5,may,2020:
Only check Open, high, low, & previous closing. I have taken snapshot at the end of the market so what you see as LTP is closing price.
open=1745, high= 1769.50, low=1678, previous closing= 1724.35, today’s close = 1690
let us see the HDFC Bank, chart now with Pv & SR.
I have encircled today’s candle when market opened. Hdfc was already falling from last couple of days, (by the way this is 1hour chart), nifty and BankNifty opened positive so as hdfc, it tried to go beyond its pivot point which is 1763, it reaches and made a new high of the day at 1769.50, however it did not sustain in that area for long and started consolidating back to pv points.
So much so that it went below pv and down till it reached to 1678, if you see the S1= 1670.
As we have learned earlier you have to make a range and to do so you can add and subtract few points to support and resistance points. For larger stocks like HDFC OR RIL , TCS at least keep it 10 to 12, for smaller stock like sbi or any other in that price range(2 to 3 ).
Now, there are two trades possible in this scenario:
- Should have short hdfc in morning when it reached nearby pv, as the sentiments were already negative and it was falling from last couple of day.
- Could have bought it nearby support 1678, as it again tried to jump 1700, and it reaches to that level, if you see the the closing price it’s nearby 1690, that’s good 22 points.
- Always keep a stop-loss, in above scenario stop-less would have been few points above R1 when selling and few points below S1.
How to Trade Nifty with Support & Resistance?
In the below image you can see the open=9429.40, high=9450, low= 9190.75, previous close= 9293.50 price of nifty.
- Nifty was already falling from last couple of sessions, pivot point was too high, when it broker the first support one have placed a short trade at S1 and kept stop loss to high of the day.
- As it tried to test the s1 couple of time there was enough time to trade and do short
- when nifty finally made the new low to s2, you could have placed a buy nearby s2, it moved 100points up from there, could have made couple of bucks
Count the Touches
The more times the price tests a support or resistance area, the more significant the level becomes. When prices keep bouncing off a support or resistance level, more buyers and sellers notice and will base trading decisions on these levels.
Support and resistance role reversal
A key concept of technical analysis is that when a resistance or support level is broken, its role is altered. If the price falls below a support level, than that level will become resistance.
On the other hand, if the price rises above a resistance level, it will often become support.
If a support or resistance level is broken, it signals that the relationship between supply and demand has changed.
A resistance breakout signals that the bulls (demand) have gained the upper hand and a support break signals that the bears (supply) have won the battle.
Important points to remember while using support and resistance:
Whenever you buying at support wait for the consolidation to happen and check if it breaking the support level or holding it. Similarly for resistance too if selling wait for consolidation to begin any trade.
Sometime the stock may make false breakouts i.e. stock prices will often move slightly further (higher or lower) than we expect them to move.
This doesn’t happen all the time, but when it does it is called a false breakout. Do not get trap in this eventually it will come to S&R level after some time.
Because false breakouts occur on occasion, the stop loss should be placed a bit of distance away from support or resistance, so that the false breakout isn’t likely to hit your stop loss position before moving in your anticipated direction.
False breakouts are excellent trading opportunities. One strategy is to actually wait for a false breakout, and enter the market only after it occurs.
For example, if the trend is up, and the price is pulling back to support, let the price break below support and then buy when the price starts to rally back above support.
Support and resistance are areas, not an exact price. Expect some variability in how the price acts around support and resistance. It is unlikely to stop at the exact same price for levels shown on chart.
Each security(stocks, index) has its own characteristics, and analysis should reflect the complexity of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better.
The basic trading method for using support and resistance is to buy near support in up-trends or the parts of ranges or chart patterns where prices are moving up and to sell/sell short near resistance in downtrends or the parts of ranges and chart patterns where prices are moving down.
S&R can be used to find targets for the trade so when you are buying stock (long), look for the immediate resistance level as target. For selling stock (short), look for the immediate support level as target. When I say target it means, you exit the trade and book your profit
Buying near support or selling near resistance may give you good results, but there is no guarantee that the support or resistance will hold. If the price moves in the wrong direction, the position can be closed at a small loss.
Try this when the overall market is less volatile, if the market is highly volatile, the prices keep swinging up & down and your stop-loss may hit, resulting in loss.
If buying near support, wait for a consolidation in the support area and then buy when the price breaks above the high of that small consolidation area. When the price makes a move like that, it lets us know the price is still respecting the support area and also that the price is starting to move higher off of support.
The same concept applies to selling at resistance. Wait for a consolidation near the resistance area, then enter a short trade when the price drops below the low of the small consolidation.
When buying, place a stop loss several points, paisa or ticks below support, and when shorting, place a stop loss several paisa, ticks, or points above resistance.
If you’re waiting for a consolidation, place a stop loss a couple points, paisa or ticks below the consolidation when buying. When selling, the stop loss goes a couple points, paisa or ticks above the consolidation.
When entering a trade, have a target price in mind for a profitable exit. If buying near support, consider exiting just before the price reaches a strong resistance level. If shorting at resistance, exit just before the price reaches strong support.
What Is The Psychology behind support and resistance?
If you are a new trader, this will take some time or say trades to understand the psychology that runs in mind of market participants. I have experienced this myself and want to share this with you. To understand it better let us create a hypothetical situation.
Let’s us assume, there are buyers like you, who’ve been buying a stock close to its support area. We will assume the support for stock is at Rs.100. After buying the stock, it moved to Rs.105.
As a buyer of the stock you are delighted and now want to buy more shares at the same support level of Rs.100, but not at Rs.105. You decide to buy again when it comes to Rs.100. In other words you are creating demand at Rs.100 level for that stock.
Now, Let’s assume there are other batch of traders. Who have waited to buy the stock at Rs.100, however may be because of fear, greed or confusion they did not act. But when stock moved from 100 to 105, they feel regret as did not made the position at Rs.100.
They have taken a pledge, next time not to repeat the same mistake, and when the stock will come to Rs.100, they will certainly going to buy it. This is called creating a potential demand.
There is third group of traders who have bought this stock much lower let say Rs.90. However, when the price went to Rs.100, they booked their profit, although the stock moved to Rs.105 & now they regret.
They might have earned a little more than this, but now they have decided, if the stocks comes down to Rs.100 they will certainly going to buy it. As their perspective have changed from sellers to a buyer this created more demand at that support level.
We discussed about the support level above now let see how things turn-up for resistance. Assume all above traders have bought the stocks at Rs.100. Think of them as one of you, taken that position. However, when the stock moves to Rs.105 you don’t sell it.
The stock moved back to Rs.100 and you think aah, its not my day, there is a feeling of remorse & regret in your mind. You start your questioning your analysis, tools. You pray to god, please move this to Rs.105 at-least once. Surprisingly, God listens your pray and it did moved to Rs.105, what you will going to do next.
SELL, you will sell as fast as you can. Similar to you, there were other traders who would be doing the same-thing as you. Now, this will create a selling pressure at Rs.105 level, and the stock would not move up from 105, great resistance have been created.
So, this is few of the probable scenarios happening all across the market. Never think you’re alone. There are countless traders and investors going through the same emotions & thought processes as you.
Major and Minor Support and Resistance Levels:
Minor support and resistance levels don’t hold up for long. It gets eventually break. For example, if the price is trending lower, it will make a low, then bounce, and then start to drop again.
That low can be marked as a minor support area. Similarly, if its trending up, you can mark the minor resistance area, it will go down for few session or months even years but it will eventually going to break those levels.
Look at the SBI Chart below(5 year chart):
We are looking the at the 5 years chart hence the view to invest would be medium to long term. As you can see i have mark the minor support and resistance area and also the strong support and resistance zones. This is very useful if you want to invest your money for at least 1 year and beyond. However, you can also book profit in short term if the result is in your favor.
We know the current situation in stock market, all the economies are shrinking worldwide due to worldwide pandemic coronavirus. SBI ,which is also one of the largest government bank is all under pressure and it has hit low, a new low, trading near about Rs.170, the earlier was in Feb, 2016 when the price were around Rs.140 to Rs.150 range.
Suppose, if the the stock falls further from the current level, the next strong support zone is around Rs.140 to Rs.150(+-5). You can make a small position to test whether it hold to these levels or not. The risk is higher as this is not the normal situation, we are facing around the world.
Having said that, the reward is also high, one can take position in (small quantity). If it falls further, check for the next strong support and try to average the positions. Stick to your investment for long term, you can also put the stop-loss to next support levels.
At the end, i would say do not stick to only identify, support and resistance levels, use other technical indicators and tools in accordance with this. Trade in smaller quantity if you are a beginner, experience what exactly happens to these levels.
One should be aware of different candlestick patterns before trading or investing to be at upper hand in comparison to others.
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Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the SR levels and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset. Please do your own research and make investment.
Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments.
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