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What is Resistance and Support in Trading?

Here are the key points about Resistance and Support in Trading:

Resistance:

• A price level at which an asset struggles to move higher due to increased selling pressure.
• It is identified by looking at historical price charts and identifying a level where the price has previously struggled to move beyond.
• Traders may expect the price to fall or experience difficulty breaking through this level.
• Resistance can be used to identify potential areas to sell or take profits.

Support:

• A price level at which an asset struggles to move lower due to increased buying pressure.
• It is identified by looking at historical price charts and identifying a level where the price has previously found buying interest.
• Traders may expect the price to rise or experience difficulty breaking through this level.
• Support can be used to identify potential areas to buy or enter long positions.
• It is important to note that a support level may become a resistance level if the price breaks below it and attempts to move back up to that level.

Example

here's an example of resistance and support in trading in the Indian stock market:

Let's say you're analyzing the chart of the stock of Infosys Ltd., one of the largest information technology companies in India, over a period of several months.

Resistance level:
You notice that the stock has been trending upwards for the past few weeks and is currently trading at Rs. 1,500 per share.
However, every time it reaches the Rs. 1,600 level, the price falls back down.
This indicates that there is significant selling pressure at Rs. 1,600 and it has become a resistance level for the stock.

Support level:
You also notice that whenever the stock reaches the Rs. 1,400 level, it bounces back up.
This indicates that there is strong demand for the stock at this level, and it has become a support level.

Traders and investors can use these levels to make trading decisions.
For example, if the stock price breaks through the resistance level of Rs. 1,600, it could be a signal to buy the stock since it could continue to rise.
On the other hand, if the stock price falls below the support level of Rs. 1,400, it could be a signal to sell the stock since it could continue to fall.

Support and Resistance Indicator

These levels can be identified using technical analysis, and there are many different indicators that traders use to help identify these levels. Here are some popular indicators that traders use:

1. Moving Averages:
   Moving averages are a popular indicator that traders use to identify support and resistance levels. A moving average is an average of the price over a specified period of time, and it can help identify the trend direction and potential support or resistance levels.
2. Fibonacci retracement levels:
   Fibonacci retracement levels are based on the Fibonacci sequence and are used to identify potential support and resistance levels. Traders use Fibonacci retracement levels to identify potential entry and exit points.
3. Pivot Points:
   Pivot points are levels that are calculated based on the high, low, and closing prices of the previous trading day. These levels can help identify potential support and resistance levels.
4. Bollinger Bands:
   Bollinger Bands are a technical indicator that use a moving average and standard deviation to identify potential support and resistance levels. The upper and lower bands can help identify potential areas of resistance and support respectively.
5. Price action analysis:
   Price action analysis involves analyzing the price movement of an asset to identify potential support and resistance levels. Traders may use chart patterns, such as double tops or bottoms, to identify potential support and resistance levels.

It's important to note that no indicator is perfect, and traders should use a combination of indicators and their own analysis to identify potential support and resistance levels.

Formula

There is no exact formula to calculate resistance and support levels in trading.
These levels are typically identified through technical analysis by looking at historical price charts and identifying price levels where the asset has previously struggled to move beyond (resistance) or found buying interest (support).
However, there are some methods that traders use to help identify potential resistance and support levels. Here are a few common techniques:

Support and Resistance Chart

A support and resistance chart is a graphical representation of an asset's price movement that displays the levels of support and resistance. Here are some key elements of a support and resistance chart:

1. Price Axis:
   The vertical axis on the chart represents the price of the asset. The price axis typically has ticks or grid lines to help traders identify the price levels.
2. Time Axis:
   The horizontal axis on the chart represents time. The time axis typically shows the trading days, weeks, or months.
3. Price Movement:
   The chart displays the price movement of the asset over time. The price movement is represented by a line, bar, or candlestick chart.
4. Support Levels:
   The chart displays the levels at which the price of the asset tends to find support, meaning the price tends to rise from that level due to buying pressure. These levels are typically identified by drawing a horizontal line at the price level where the asset has bounced back from in the past.
5. Resistance Levels:
   The chart displays the levels at which the price of the asset tends to find resistance, meaning the price tends to fall from that level due to selling pressure. These levels are typically identified by drawing a horizontal line at the price level where the asset has struggled to move beyond in the past.

Traders use support and resistance charts to help identify potential entry and exit points for their trades. The levels of support and resistance can provide valuable information about the strength of the trend and the potential for price movement.

FAQs

here are some frequently asked questions about resistance and support in trading in the Indian market: