Support and resistance
Buy at support, sell at resistance - keeping this simple line in mind can help you roughly understand whether it is a good time to buy or sell a Stock But what do these terms really mean? Watch our engaging and easy-to-understand video from the #LearnWithUpstox series to get a clear understanding of support and resistance.
Welcome back to a new blog of ‘Learn with Upstox’. Ever wondered how to earn money in the stock market? If you google this you will come across resources that tell you to buy on support points and sell on resistance points. It is very important to understand support and resistance. Two simple concepts that seem obscure for most of us.
Let’s understand these concepts better with a few examples.
Imagine I am standing on the 6th floor of a building. Now, no matter how high I jump I can’t possibly break the ceiling and get to the 7th floor. Similarly, the ceiling acts like a resistance and the floor level acts like support
As we can see in the image above, the 200 mark is acting like the Support. In simple words, Support is a level from which the price is expected to rise. In the same chart, we also see that the 300 mark is like a resistance point.
Now imagine, I’m on the 6th floor and I take stairs to get to Level 7 without jumping and trying to break the ceiling. Now, the 6thfloor’s ceiling becomes my Support and the 7th Floor’s Ceiling becomes my Resistance. Thus, once a crucial level breaks, the Resistance converts into Support.
A Resistance acts as Support when it's broken and the price rises above it. And similarly, the Support acts as Resistance when it’s broken and the price falls below it.
Similarly, in the same image, when the market breaks the 300 mark and goes up, we realise that when it comes down, the 300-mark acts like a Support and nor a resistance point anymore.
A price level approaching from the bottom is Resistance, while Support acts as Resistance when it is broken and the price falls below it.
These basics always make for a strong foundation, but it is advice to delve deeper into exploring various trading tools. Moving average, Pivot points, VWAP (Volume-Weighted Average Price), Fibonacci retracement extension etc. are all efficient concepts in performing one very important job. To bring out the Levels.
Now what do levels do!? Levels are studied to decipher and analyse Support and Resistance. One must consider buying if the price gets the Support and stops falling. If the price starts to face Resistance and the price seems to be about to fall, one must make use of selling.
The other important concept is Supply Zone (SZ) and Demand Zone (DZ). When the market reaches a crucial point and encounters Resistance, the range of Resistance Points is called the Supply Zone.
There is a specific reason why markets fall after reaching the Resistance point. It happens due to the increase in Supply, as the selling pressure overwhelms the Resistance point, expecting the fall in the market.
Now let’s focus on the Demand Zone. For instance, you fancy investing Rs. 1500 in a stock that has the current value of Rs. 2000. Now, imagine it does reach 1500. The change at this Support point will catapult buying, and naturally at this point investors will be excited and will start buying the stock, hence raising the demand and therefore the name ‘Demand Zone.’
So, what is the difference between Support and Resistance or Demand Zone and Supply Zone? Let’s have a look at the image below.
As you could see in the Supply Zone, the market first goes into an up-trend, and then falls from there and takes Support from the Demand Zone before rising again. It is to be noted that the rise takes Resistance at a lower high before starting to fall again. So, this whole range is calculated and is denoted as the Resistance Range. In the example, the Range is Rs. 200-220. For our reference, this is also the Supply Zone.
Similarly, if we’re talking about a range in Support Level we would call it a Demand zone.
So, while speaking of a range, we always speak in terms of Supply or Demand Zone. And when speaking of a specific point we speak in terms of Support or Resistance points. In other words, Supply and Demand Zones represent a price range, whereas Resistance and Support represent specific price points. The ranges and the zones talk a lot about the rise and fall of the market.
To understand it better, you could explore a few charts’ data to figure out the Support & Resistance Points, and the Zones data, mark them and see what you’ve missed. If you got everything right, more power to you.
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