How to identify Support and 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.

Jul 10, 2017 03:07 IST others Hadrien Mendonca |

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:-
  1. Trendline
  2. Moving Averages
 
1) Trendline:-
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.
 
Chart
 

 
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.
Eg:- To calculate 10-day simple moving average, simply add the closing prices of the last 10 days and divide by 10.
 
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.
Chart


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