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:-
- Moving Averages
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:
- 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.