In the technical analysis of the Stock Market, any student needs to understand and apply the concept of ‘Support and Resistance’. Though it is basics, a student will come across this many times in the application of technical analysis.
Before discussing further, let us understand what are Support and Resistance. Support is the price level at which many buyers will find the share price attractive to buy so that further decline is unlikely. Resistance is the price level at which many sellers will find the share price attractive to sell so that further advance is unlikely.
I am an ardent fan of this concept. Let me give you a few reasons for my liking:
- Support in long (buy) position is a good stop loss point and similarly resistance in short (sell) position is a good stop loss point. In fact, fixing stop loss (which is vital) can be done very easily using support and resistance levels.
- Resistance gives an idea about the likely advance or target in long positions and support gives a likely measure of the likely decline in short positions. In other words, resistance / support give an approximate target, at least for the short term.
- Using Para 2 and Para 1 as above, one can easily compute the Reward-Risk ratio. In choosing between two shares for buying or selling, one can definitely use this ratio and opt for the share that has a higher Reward-Risk ratio.
- This is one of the many things, I enjoy in the Technical Analysis of the Stock Market; once the share price crosses a resistance level, that level can act as a support. Similarly, when the share price goes below the support level, that level can act as a resistance. Based on this, one can revise the support and resistance level to increase the profit.
I salute those who have developed this concept, since it is so handy and can be prefixed to minimise losses and maximise profits. Kindly share your views on this.
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