Support and Resistance define boundaries for rising and falling prices.
Support: Support level
is the price around which previously, a particular security/commodity finds incremental demand. Traders use this level to enter the stock.
Resistance: Resistance level
is a price around which a stock finds incremental sellers. Traders use these levels to exit a long position or even short sell a security.
The following are two basic tools to identity support and resistance:-
The oldest and easiest way of determining trend is with a "Trend Line." All that is required is two support points to draw an uptrend or two resistance points to draw a downtrend.
2) Moving Averages:-
A moving average is one of the most popular tool in a trader arsenal. It aids the trader to identify the true underlying trend. It is usually constructed using closing price of a stock eliminating the intra-day volatility. It is a trend following but a lagging indicator.
For Eg: If prices move sharply in a direction up/down, the moving average follows prices with a lag i.e. It will take time to catch up.
There are two basic types of Moving Averages:
Eg:- To calculate 10-day simple moving average, simply add the closing prices of the last 10 days and divide by 10.
Simple Moving Average
SMA assigns equal weighting to all values.
Exponential Moving Average
EMA gives a higher weighting to recent prices.
The EMA works by weighing the difference between the current period's price and the previous EMA, and adding the result to the previous EMA.