Support And Resistance The Ultimate Guide

Support and resistance are psychological levels in the chart where buyers and sellers react very extremely and it acts as a wall. So it’s expected that the price will stop and reverse from these levels.

There are many concepts and strategies in the market but the most used and discussed topic is support and resistance and in this post, you will learn about that in detail.

What are the support and resistance?
In technical analysis, support is a strong price level where the demand is very high and it’s hard for prices to fall below that level and the level will always be below the current price point.

In other words, bulls are very active at any support level and they are willing to buy at that price level due to their high conviction, so it is expected that whenever the price reaches a support level, there is a high probability that the price will hold that level and will not fall further.

But remember support does not always hold, sometimes the price will break the support level and continue to fall further which means bulls lost the battle, so bears are able to break the support.

If the support is broken then another support level will be established at a lower level.

Similarly, in technical analysis, resistance is a strong price level where the supply is very high and it’s hard for prices to rise above that level and the level will always be above the current price point.

In other words, bears are very active at any resistance level and they are willing to sell at that price level due to their high conviction, so it is expected that whenever the price reaches a resistance level, there is a high probability that the price will stop at that level and will not rise further.

But remember resistance does not always prevent the price from further rising, sometimes the price will break the resistance level and continue to rise further. That means bears lost the battle so bulls are able to break the resistance.

If the resistance is broken then another resistance level will be established at a higher level.

What is the dynamic support and resistance?
There are two types of support and resistance 1. Static Support and resistance and 2. dynamic support and resistance.

Static Support and resistance or traditional support and resistance is an area or price level which is not moving and people consider that level as a support and resistance.

On the other hand, dynamic support and resistance is not a particular area or price level, this kind of support and resistance is moving constantly and the price level is different every time but that’s also considered as support and resistance.

You can use ema as a dynamic support.

This is the difference between traditional support and resistance and dynamic support and resistance.

I will explain how to identify these support and resistance levels later in this post.

What is the psychology behind support and resistance?
The market is all about psychology and that’s the main reason technical analysis exists.

So let’s talk about the psychology behind support and resistance.

Think of a scenario where there are 3 groups of market participants and let’s assume a stock called “X” trading at 100rs and the support is at 100rs.

The first group of market participants bought the stock at 100rs and then a few days later the stock goes to 150rs.

Now the first group of participants is regretting that they should have bought more at the level of 100rs and they are thinking that if the stock comes to 100rs again they will buy more.

The second group of market participants were watching the market from the sideline but did nothing. As the stock went to 150rs from 100rs, they started regretting that they should have bought at the level of 100rs, so they are praying that if somehow the price comes to 100rs again they will buy the stock.

Now the third group of market participants who shorted the stock at the price of 100rs thinking the price will fall from that level but the price went up to 150rs, so they are losing money and praying that if the price will come to 100rs again they will exit their position.

And that creates the demand for the stock at 100rs price point. So when the price will come to 100rs, the price will bounce from that level. And that’s how support is formed.

Now then again think of a scenario where there are 3 groups of market participants and let’s assume a stock called “Y” trading at 150rs and the resistance at 150rs.

The first group of market participants shorted the stock at the 150rs price level and a few days later the stock comes to 100rs.

Now the first group of participants regrets that they should have shorted more at the level of 150rs and they are thinking that if the stock comes to 150rs again they will short more.

The second group of market participants were watching the market from the sideline but doing nothing. As the stock came to 100rs from 150rs, they started regretting that they should have shorted at the level of 150rs, so they are praying that if somehow the price goes to 150rs again, they will short the stock.

Now the third group of market participants, who bought the stock at the price of 150rs thinking that price will go up from that level but the price came to 100rs, so they are losing money and praying that if the price will go up to 150rs again they will exit their position.

And that creates the supply for the stock at 150rs price point. So when the price will go to 150rs the price will immediately fall from that level. And that’s how resistance is formed.

So this is the reason support and resistance work and psychology play a huge role.

Important tools and indicators for identification of support and resistance
There are many different ways to identify support and resistance. But there are also some tools and indicators in the market to simplify our work. Now I will talk about that in detail.

EMA: Ema is a trend following indicator and works as dynamic support and resistance in the market. There are different types of ma in the market but personally, I suggest exponential ema.

The downside of this indicator is it works only in trendy markets. When the market is trending higher ema acts as a support and when the market trending lower ema acts as a resistance.

It’s a great indicator for identifying support and resistance.

This is the chart of HINDUNILVR, notice in an uptrend when the price came to ema price bounced, and in the downtrend when the price went to the ema it acted as a resistance and fell from that level.

Trendline: Trendline is another tool that works well to find dynamic support and resistance. When the price is trending higher or lower, you can draw a trendline by connecting two price points to see the potential support and resistance for the future.

Whenever the price will come to the trendline support area, the price will go up in an up-trending market and when the price will go to the trendline resistance area price will come down in a down-trending market.

So you can also use trendline indicators to find support and resistance in the chart. Now let’s dive into a chart example.

This is the chart of TATAMOTORS. After the 2020 crash, TATAMOTORS started going higher, and notice in the chart when the stock came to the trendline support area, it bounced. That shows how good a trendline works in the market as dynamic support and resistance.

Round numbers: Round number is another psychological trade parameter in the market that works well to find support and resistance.

There is not any clear answer to this question about why round numbers act as a support and resistance. But I think market participants are more comfortable buying a stock at the round level and exiting at the round level, also putting stop loss at the round level.

And that creates a huge number of buy or sell orders in a particular round number, so that’s why a round number like 50,100,150,200 works very well as support and resistance.

What is the support and resistance zone?
If there is a support at 100rs that doesn’t mean that price will bounce from exactly 100rs price point, the price may come a little below 100rs or can bounce from 99rs.

In technical analysis, there is not an exact science that will happen because the exact textbook definition doesn’t work in the market and technical analysis is more of an art than a science.

That’s why the concept of “zone” comes into the picture. According to the “zone concept” we consider an area to define support or resistance instead of an exact number.

How support becomes resistance and resistance becomes support
In technical analysis, another concept of support and resistance is support and resistance role reversal.

After a support breakdown or resistance breakout when the price comes back to these levels in the future, support acts as a resistance, and resistance acts as support.

Check out the chart examples below for a better understanding.

Limitation of support and resistance
As I said earlier in the other post also that in technical analysis there is not any holy grail, nothing will work 100% of the time in the market.

So don’t get over-excited and start buying aggressively at a support level and shorting at a resistance level, you can lose huge money because it will not work every time. There are many more things to consider before taking a trade.

Significance of support and resistance
Support and resistance become more significant if a price level is tested more than 2 times, that is considered strong support and resistance level, also the higher the timeframe more significant that level is.

If a level is tested more than 2 times then more traders will notice that level and they will take trade decisions based on that level also a higher time frame is more powerful because the big players are not looking at small time frames like 5 min charts they are watching higher time frames to take trades.

Key takeaways
* Support and resistance act like a wall.
* Psychology plays a huge role in forming support and resistance.
* Traders use support and resistance to enter and exit a trade.
* After a support breakdown, support acts as a resistance and after a resistance breakout, resistance acts as a support.