Support and Resistance in Stock Market – Mastering the Basics
Author: George Davis
What is Resistance in stock trading?
Support and Resistance are the two most basic attributes of technical analysis. These terms refer to the price level on a stock chart that prevents assets from breaching certain levels and being pushed in an adverse direction.
Initially, the idea of Support and Resistance seems easy; however, as traders dive into these concepts, they understand that Support and Resistance come in various forms.
What Is Resistance in Stock Trading?
Resistance is something that prevents the price of a stock from rising beyond a certain point. Most often, traders use this point to comprehend the exit point in the stock market. The resistance level defines a price point on the trading chart where supply for a given stock is maximum. It is one of the most essential technical analysis tools traders use to identify the potential profits from selling their holdings. Finally, recognizing the Resistance is easy as it will be a point well above the current market price. Here are three things resistance level signifies for traders and represents the point for maximum output.
Resistance levels signify an excess supply.
Excess supply portrays selling pressure.
Selling pressure decrease the price.
What Is Support in Stock Trading?
Now that you know what “Resistance” is, it’s relatively easier to understand “Support.” In simple terms, support is the opposite of Resistance, representing the maximum lowest price point of a stock. It is a point where traders assume maximum demand (in terms of buying stock). Whenever the price of a particular stock falls to the support line, it’s likely to bounce back. The increase in stock price after touching the “Support” line is due to the law of demand in economics, which states that “When prices decrease quantity demanded increases” As traders start buying at the “Support” point, the price increase and the demand begins falling.
How Reliable Are Support and Resistance?
Like any technical analysis tools, support and Resistance are subject to the assumption that “everything remains constant.” Market uncertainties control the stock prices and sometimes render Support and Resistance useless. However, the best way to use Support and Resistance is to check historical data of the stock of your interest. Understand its patterns and try to figure out whether your stock of interest touches the resistance point or has a trend of dropping after coming close.
The Bottom Line
Support and Resistance are reasonably honored by traders when it comes to predicting buying and selling stock periods. However, this technical analysis is not entirely helpful when trading volatile stocks. Moreover, Support and Resistance are the basics of technical analysis, and they help understand price action and stop-loss strategies as well.
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