Stock Market Trading - Support/Resistance level

Support price is a price where Buyers come in huge numbers to protect the price of the stock and generally do NOT let the stock close below this price. Conversely, a Resistance Price is the one where Sellers come in big numbers and do Not let the stock close above this resistance price.

Support and Resistance levels are not made/established overnight. It is a pattern that is formed over a period of time. Generally 6 months is the ideal time-frame, which is what we also use on our site. Both Support and resistance have strengths associated with it. And this strength depends on how many times a stock visited a particular price and how much accumulation happen at that price. The more number of times a stock visits a particular price, the stronger the action. Either Resistance or Support. Let us take an example of Maruti Udyog from the Indian stock Market. Note, that the same is applicable to any stock anywhere in the world. Take a look at the Chart below. From September 04, until late November 04, it has been testing Rs.394 price range a few times. And it decisively broke out on more than daily average volume around November ending. Once it broke out, there was no resistance above it. Until in early January, where the steam went off and it could not hold the Rs.460+ level and turned south.

Most traders would jump into the ship and buy when it starts going down. And many keep averaging down until they are completely out of money, unfortunately. Instead a novel approach would be to wait for the price to drop to the last strongest support level which is and still has been(until the time this Chart was drawn) Rs.394 as reported by our very own support/resistance calculator. Guess what, Maruti again touched this price and started it's upward journey, again to face resistance at Rs.461 which is a relatively strong resistance level. Though it tried to break the 460+ barrier a few times, touching as high as 500+, it couldn't hold on and turned south all the time. Now if you look carefully at the chart, every time it turned south, it found support just around 400. Why, because, this is a very strong support level and buyers do NOT let the price of this stock close below 400+. Also every time it tries to go near 460, a huge resistance comes in the form of sellers and it turns south.

So to sum up, if a trader had waited enough to buy at the strongest support, he/she would have made good money(around 15%+ profit) within a very short time span(less than 12 trading sessions). Please note, this is NOT a hypothetical example, and it works with almost all the stocks.

Always buy at Support and Sell at Resistance, at least for the short-term.

Earlier Articles:

Technical Analysis & Decision Making . . . . Crossovers-Bullish & Bearish . . . . Trading System . . . . Fibonacci Retracements And How to Benefit From It . . . . BreaOuts & BreakDowns of Stocks . . . . MACD Indicators . . . . Volume & It's Importance


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