So far we have learnt about Stock Trading Basics where you have understand how stock market works. And what is the difference in Investment and Trading. Then we read about the Movement of Stock Market in order to foresee our Stock Movement with the help Candlesticks. And after that we have learnt about Candlestick Patterns which helps us generating a Tradingview on our stock portfolio.
In all those blogs we have understood how to read Candlestick Patterns. However, we still don’t know when to enter and exit from our selected stock. Till the time, you don’t know your entry and exit from the stock, you will not be a satisfied trader. Also, at the same time you will be less profitable in your journey in stock market.
What is Support & Resistance ?
A price point where stock finds a level of support formed and it is supposed not to fall further from this price point. From a general point of view, we can understand, sellers are exhausted and they don’t have much to sell now. As a result, Buyers can make their entry on the stock and trend can be revised. A support is always a price below the current price level.
A price point where stock find difficulty to raise further. As a general perspective, we can understand that Buyers are not anymore interested on this stock to buy at current levels. Those who are holding the stock are now converting into sellers and want to book profit from the stock. Hence it is clear that movement of the stock will be Bearish. A Resistance is always above the current price level.
Why Support and Resistance are required ?
Suppose you have entered into a share at Rs 100 with quantity 500 and it gained 5% gain after you bought it. So your profit is Rs 2500 which is a good profit in few days and considering the same, you sell your stake at Rs 105. However, it was still raising and reached Rs 110 after you sold at Rs 105. So you have missed another Rs 2500 profit. This will make you regret that why you sold your stock at Rs 105.
On the contrary side, if you have kept your stock in your holding at Rs 105 assuming it will raise upto Rs 110. However, after reaching at Rs 106, it took a U-Turn and fell below Rs 95. This will create a panic and you would have to sell your stake in loss of Rs 2500. And both the scenario happens just because you don’t know your entry and exit points. Support and Resistance helps us to understand our entry and exit point on any stock.
I am not saying that you will find the exact Top and Bottom of the Stock. Because, no-one on the globe is able to do the same however, you will be able to get a price point near Top and Bottom. Which will indicate your entry and exit point from a stock. This will help you to make you be a consistently profitable and sensible trader.
How to find Support & Resistance ?
Load your trading window with 10-12 months data with candlestick showing 1 day. Once you squeeze your trading window, it will look something like this
This is a graph of L&T as on 14 Apr’19 and squeezed for 1 year data with 1 day per candlestick. Now from the Assumption of the Stock Market we know, history tends to repeat itself which can be seen in above image or any stock chart that you select, you will find the same repetition somewhere in the past.
I have marked support with ‘Red’ circles and Resistance with ‘Green’ Circles. It is clear from the chart that this stock was not able to break price point of Rs 1450 by 2 times which is all time high price for this stock. And similarly it was not able to break price point of Rs 1420 by 3 times in the past. Hence, there is 2 resistance price for this stock Rs 1420 and Rs 1450.
On the contrary, Support is a price point where sellers are exhausted and trend can be revised now. According to history of L&T Stocks, there is a support price point formed at Rs 1275 and another support is formed at Rs 1220.
How strong Resistance or Support is ?
Yes, you heard me right! There is a strong and weak kinds of Resistance and Support. In the image above, Points 6,7,8 are showing one Support Level with 3 times repetition in the history at Rs 1450. However, Points 9,10,11,12 are showing another Support Level by 4 times repetition in the history. So it can be understood, Higher the Points, Strongest your Resistance or Support Level. There are lesser chance to break Strong Resistance or Support by the Stock.
So a trader can see an opportunity to ride on stock near support level and exit near resistance level. It is not certain or written anywhere that the stock will reverse from Resistance or Support however, as per Technical Analysis, it depends on the mind share of traders and only an assumption based on probability. So never try to time the market.
To be a successful and consistently profitable trader on D-Street, you need to decide your entry and exit with right kind of stock before any action. And then you need to follow your decision with proper discipline. Don’t be greedy ever, else you may face severe losses. Because if you don’t sell your stocks at the right time, it might get reverse and fall below your purchase point.
Support is a price point below current price level that indicate buying interest & Resistance is a price point above current price level and represents selling interest. Load your trading window with 10-12 months of data points and place horizontal line with 2-3 points at the same price level with a good price action in order to find a Resistance or Support for the Stock. Support or Resistance can be used to find your entry or exit on the stock however it is not certain. Price may fall below Support level or rise further above Resistance level. So a trader should weigh the opportunities and act accordingly.