Traders and investors must be efficient at identifying and analyzing stock prices. It enables them to understand when market conditions are in their favor and figure out entry and exit points. The concept of support and resistance in the stock market is crucial for proper trade analysis.
Tracing patterns of price movements is crucial for identifying the ever-changing support and resistance levels. If you are new to the world of trading, you must be eager to know “what is support and resistance in the stock market.” Scroll through this article to discover more details about the concept of support and resistance.
What Are Support and Resistance?
The support line indicates the lowest level of the price of any asset or stock. After receiving the support level, the stock or asset price can go down any further. Due to the dropping price, the buying demand increases, and sellers become unwilling to part with that stock or asset.
Resistance is the exact opposite of support and prevents a stock or asset price from rising any further. Therefore, the resistance level signifies the highest price of a particular stock or asset. The booming price makes sellers more interested in selling, but the lack of buyers reduces demand.
How Do Support and Resistance Work?
Traders must know that support and resistance levels are temporary and are influenced by price trends. They, in turn, influence investor sentiments by making them buy or sell according to the situation.
● Support Level
When a stock reaches the support level, traders become more likely to invest in it. The demand increases because of the belief that the price will go higher. As a result of the rising demand, the stock price starts moving upward. The support level sustains itself as long as no unusual activity pushes the price downward.
● Resistance Level
Once a stock reaches the resistance line, it becomes the exit point for traders. An asset’s price is highly likely to fall right after touching the resistance line after an upward trend. The resistance line makes traders eager to sell the asset because they don’t want to face loss. With traders selling in large numbers, the price goes downward, and the resistance line can sustain itself.
Are Support and Resistance Levels Reliable?
The reliability of support and resistance in the stock market is based on the following factors:
● Trading Volume
The trading volume helps analysts recognize the crucial price points along with the support and resistance levels. A price point becomes reliable right after it records adequate buying and selling.
In case a price action makes investors sell specific assets or stock classes in bulk, investors will consider a short position after it reaches the next level. It sheds light on the tendency of investors to sell at the breakeven point and not before it because they continue to expect a rising trend.
● Touch Count
The number of times a price point has attained support and resistance in the stock market before rebounding marks its reliability. If a support line consistently prevents a stock price from falling, it instantly becomes more reliable. Therefore, it will be highly likely to influence the decision of investors. Meanwhile, traders won’t pay attention to levels that fail to maintain the consistency of price actions.
The reliability of support and resistance in the stock market also depends on their duration. Support or resistance levels become more reliable when they can hold on to price actions for prolonged periods.
● Price Moves
The reliability of support and resistance in the stock market depends on the depth of price increase or decline. A steeper price movement will attract more investors than a slow-moving downward or upward trend. Therefore, it has the chance of attracting stronger support or resistance.
How to Utilize the Support and Resistance Theory
Traders use the theory of support and resistance in the stock market to plan their entry and exit points. Any price action reaching the support level provides investors the opportunity to take a short position after analyzing other indicators. Meanwhile, a breach during an uptrend can indicate a reversal.
Are There Any Tools for Support and Resistance?
A few tools for finding support and resistance in the stock market are as follows:
● Fibonacci Levels
Fibonacci retracements help identify the best entry points while a trending market is retracing. On the other hand, Fibonacci extensions are useful for traders in determining the optimal target points in a trending market.
Fibonacci retracement lines become support lines during an uptrend, and they become resistance lines during a downtrend. On the contrary, Fibonacci extension lines indicate resistance during an uptrend and support during a downtrend.
In an uptrend, a trendline acts as a semi-dynamic support line. In a downtrend, a trendline serves as a semi-dynamic resistance lin
● Peaks and Troughs
Peaks and troughs are the easiest way of plotting support and resistance in the stock market. This method involves simply marking the highs and lows on the chart. The higher highs and the lower highs show resistance levels. Meanwhile, the lower lows and the higher lows will indicate support. Marking these lines on longer timeframes is useful for getting more reliable support and resistance levels.
After understanding the support and resistance meaning, traders will understand the importance of instances that have led the price actions to reach these levels. Additionally, the events that have made price actions violate the support or resistance lines are also crucial.
A previous support line can become a resistance line after showing a significant fall in prices. Similarly, resistance lines can become support lines after the prices shoot up too high.
Therefore, support and resistance are crucial for technical analysts to determine the future price of a security or market.