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Trading with Support and Resistance levels

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SUPPORT AND RESISTANCE is one of the most important trading concepts that you would come across. You must be knowing that price fluctuations in stock market are uncertain, it may rise, fell or even consolidate in very small range.
SUPPORT AND RESISTANCE levels can be used by a technical analyst or traders to get an idea about where the trend reversal may take place, when to enter or exit the market. These reasons make them one of most discussed attributes of technical analysis.
So before getting to know more benefits of SUPPORT AND RESISTANCE levels & how to use them for generating more profits.
You are advised to read the whole article as most of the traders get it wrong & they can’t even draw the support or resistance levels correctly.

What are SUPPORT and RESISTANCE levels

If we talk generally, support is something which is used to stabilize the weak condition. In stock market also when prices of stock are declining, they bounce back at some level and start rising again, that specified level is referred to as a support level. While in opposite condition, when the stock prices are increasing, they are not able to cross a particular barriers level which we call as resistance level.


As it is clear in above image that support act as a floor and resistance is acting as a ceiling (and crossing both of them is little bit difficult).
support and resistance levels
Reason : Whole market is the game of demand & supply. When prices are decreasing, more buyers start to enter the market & due to this increased demand, prices at some level starts rising and thus forming the support level.
When this price is increasing , number of buyers entering the market decreases significantly and selling activity increases beacuse nobody wants to buy anything by paying higher price. As the selling activity increases, it means supply is increasing and due to this, price start decreasing at some resistance level.
Remember : As the buyers enter the market, prices increase while sellers lead to decrease in the prices. A decreasing market is called bearish market while increasing market is called bullish market. Therefore, Buyers are called Bulls & Sellers are called Bears.
So, we can say that support occurs due to the concentration of demand and resistance forms due to concentration of supply.

Identification and formation of SUPPORT AND RESISTANCE Levels


Identifying the support & resistance levels market is very easy but crucial , as wrong marking may lead you to heavy losses. So, for drawing the SUPPORT AND RESISTANCE levels, do as follows.
Zoom out the candlestick chart to get more numbers of candlesticks visible on the screen. Now draw the Horizontal lines on the most obvious levels where the trend reversals have taken place multiple times. You can take the help of examples shown in the following image.
how to draw support and resistance levels

You can now adjust the designed lines a little bit to get the more numbers of wicks / shadows touching them. You should try to not let these lines pass through the body of candlesticks. But it is okay if they cross the body of candles in order to get more numbers of wicks in touch, but more numbers of wicks in touch, but then also, the crossing of bodies should in very low amount.
You have to keep in mind that trend reversal does not take place every time the price reaches the supply or resistance level.
So, some conditions are listed below which indicates the trend reversal will take place or it will break through the SUPPORT AND RESISTANCE level and continue the trend.

Reversal or Breakthrough from SUPPORT and RESISTANCE levels

Reversal of trend
  1. When you see a power move : when a strong power move approaches a support or resistance level, probability of its reversal is very much higher. But what do we call a power move? It is a strong momentum price – action with somewhat large bullish or bearish candlesticks. You may understand it by observing the example below.
    how to draw support and resistance levels
    So, when you see large body candlesticks rushing towards a level, you can take it as a trend reversal pattern.
  2. It is also believed that longer time the candles remain away from a particular level, stronger that level becomes and as it is also a long-term level, it becomes more reliable. Due to all this, most of the traders would be having an eye on this level and will trade accordingly. As the price reach that level, general market sentiment is not ready to cross it & thus, it becomes more likely condition for trend reversal.
  3. Traders do also make use of candlesticks patterns to get some idea about trend reversal. For example: When candlesticks with large wicks like a shooting star or a hammer are seen, it may be carved out that either Bulls or the Bears are heavy on the other during that particulars time period and thus, these candles are considered to be strong rejections to the movement & if they occur at a certain support and resistance level, these rejections can result in Trend Reversal.

breakthrough the Support and Resistance levels:
  1. As you have read that strong momentum power moves result into a Trend reversal, so it’s clear that you would not like see it if you want a Breakout.
    So, the characteristics of the candlestick that may result in the Breakout are:
    • These candlesticks are not much large in size.
    • These candles do not show a clear & straight move towards the Support and Resistance level.
    They fall & rise continuously forming various small Support and Resistance levels which make the traders having different target price for exit or entry of trade. As a result, no strong action is taken by buyers or sellers, price continuously to move is same direction and a breakthrough takes place.
  2. Moving Average indicator can also help you out in the case of consolidation. When the stock price is provided a constant Support or Resistance by the moving average curve of period of about 20 to 50, it will cross the barrier of Support or Resistance on reaching it.
Remember: When a support level is crossed by the price chart of the stock that same support now acts as a Resistance for the price movement & try to not let it cross that level, but if it’s crossed, it again becomes Support. So, Support & Resistance levels are named only relative to price. They are only the price barriers which does not let the price to cross them.

Mistakes People Generally Make While Trading with Support and Resistance

Following are some of the mistakes which people generally make while trading with Support and Resistance level, if not studied the concept properly.
  1. The more times a Support is tested, the stronger it becomes: This Statement is not true always. When there is a case of lower highs (High of each correction is lower than the pervious one) taking support on certain level, it shows that Buyers are Weakening over time (as higher pts. are decreasing over time, it means Buyers are not able to take the price higher), and in near future, sellers will control the game & will break through the support . This condition can be good example of the first situation we discussed in Breakthrough conditions


    Similarly, in the case of higher lows, it is possible that Buyers will control in near time and Breakthrough the Resistance
  2. Another mistake committed by the novice traders is that they place the Stop-Loss exactly on the Support or Resistance. You are always advised to place the Stop-Loss little bit below the Support while buying the trade & if you are performing short-sell, place the stop-loss little bit higher than the Resistance level as at these levels, other seller & Buyers are also testing the market, due to which prices can go little above or below the level and then move in expected direction.
  3. Many traders believe that Support & Resistance derived from recent price actions are very much important, which is true but you should never underestimate the power of levels derived from longer trends. These levels can be very much powerful.

Trendlines

What we studied above is very common, basic and simple form of Support and Resistance. They are static barriers but as the stock market trends increase or decrease, it is not very uncommon that these barrier levels also change. Therefore, these are not only meant to be horizontally, they can be at slope also which we name as Trendlines.
Everything works for them same as Support and Resistance levels which we studied above. So, the illustration below will let you understand everything.
trendlines zerodha technical analysis
The rules to draw Trendlines are also same as that of Support and Resistance levels i.e. Zoom in the charts & mark the most obvious rays touching the maximum numbers of wicks.

Using Support and Resistance with other Indicators

  1. By this beautiful strategy, we can know one day prior about which stock can possibly breakout the next day. What we have to look for is a triangle shape as shown below:

    Set the time frame of chart at 1 day. Now observe the charts ad of you find a triangle in candlesticks, a breakout is possible next day. To know the direction of breakout, you can use the MACD indicator. If it gives you a buy signal, it would most probably breakthrough the Resistance and breakthrough of Support is possible if it provides a selling signal.
  2. You can decide whether to buy or sell by using Trendlines of Support and Resistance with Moving Averages Indicator also. Place the long-term MA Indicator i.e. 200MA If the price is sailing above 200 MA curve, you should try to find a buying opportunity (when price hits Support level or breakthrough the Resistance) and if the price is trailing below the moving averages curve, then you should find out the selling opportunity.
    trendlines support and resistance with 200 MA

--------Download the pdf of this whole article here--------

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