In stock market, the concept of support and resistance is among the highly discussed topics. Both levels play a vital role in the technical analysis of the trend of the stock. Both levels are essential in analyzing the charts in the stock market and are majorly used by the traders to prevent the loss in buying or selling any asset. These two levels act as barriers to determining where it is safe to trade. It prevents the price of the asset from pushing in an unwanted direction.
It may seem easy at first glance, but the support and resistance levels come in various forms, and it isn't easy to gain mastery.
Let us first understand what is support and resistance in stock market. Support can be defined as the price level where you can see the downfall. When the price of an asset falls, the demand of the share increases and forms the support line. So to control the buying of the excessive share, the support levels are used. In the stock market, when you see excessive buying or excessive selling, it all points to a harmful impact on the overall economy.
The resistance zone is quite the opposite of the support. The Resistance zone rises. When the price of the share increases, people tend to sell the shares. That price serves as an entry or exit point when the support or resistance zone is defined. After reaching the support or resistance level, the price of an asset can have two outcomes: either they bounce back or continue moving in its direction, violating the rules, until the next levels.
Traders can determine whether they need to bet on a specific price or not. They are based on the direction of the moving price of an asset. If the price moves in the opposite or wrong direction, then the trader can close that trade bearing a nominal loss. But if it moves in the right direction, the trader can earn a handsome profit amount on that trade.
Talking of the support and resistance basics, only the most experienced traders can explain exactly how to prevent the pushing of the price of an asset from moving in the wrong direction.
In simple terms, it can be said that the resistance is the ceiling, the price of an underlying asset cannot reach far than that, the price either stops moving further or can break the rule and go beyond.
Best indicator for support and resistance
As we have seen the support and resistance levels in the stock market, we will now see the best indicators for support and resistance. Depending upon the patterns of the charts, the indicators are determined. Now, all such patterns are named according to their behavior and movement in the underlying asset price. We will learn some of the best indicators for support and resistance.
1. Fibonacci: It is a series pattern; the next number results from adding the previous two numbers.
Example: 0,1,1,2,3,5,8,13,21,and so on…
This kind of indicator is used in trending markets. The result should be evaluated from left to right. The numbers are used to find the entry points in the trending market. And by looking at the graph, we can determine the high swing, low swing, and Fibonacci retracement point, where the traders are advised to make a move as, from that point onwards, a new trend can begin.
2. Wolfe Waves: Wolfe Waves is the second type of indicator initially found by Bill Wolfe. It is a natural pattern, available in all the markets. This indicator is reliable and makes good resistance and support levels. It is a 5 wave pattern. As the name suggests, there are 5 waves of demand and supply moving towards equilibrium (Price). To plot the chart of this indicator, traders should keep the following in mind:
Waves 3-4 must remain within the channel created by 1-2
Waves 1-2 equals wave 3-4
Wave 4 should be between waves 1-2
Wave 5 Exceed the trendline created by waves 1-3.
3. Camarilla pivot: This indicator for support and resistance is widely used by expert traders; the reason behind this is its simplicity. By observing it for a few minutes, the trader can technically analyze it. It provides valuable, simple, and automated Support and resistance levels. It has gained huge respect from professional traders.
Other advantages include the following:
No further adjustments needed
The Charts look simple with 6 basic lines.
4. Murrey Math lines: according to the theory of Gann, the price moves in the form of Octaves. In this indicator of Murrey math line, it is shown as 1/8s. All the octaves line represents different things such as follow:
● 8/8 and 0/8 Lines (Ultimate S&R): the traders find the rejection in entering the markets with these points.
● 7/8 Line (Weak, Stall, and Reverse): this is weaker resistance. The prices from this point bounce back very quickly.
● 6/8 and 2/8 Lines (Reversal Pivots): this line can move the prices in the opposite direction.
● 5/8 Line (The Top of Trading Range): this can be said as the good for selling, compared to what prices the assets were purchased.
● 4/8 Line (Major Support/Resistance): the best place to either sell or buy at this line, as this builds strong support and resistance.
● 3/8 Line (The Bottom of Trading Range): if the price is below this level and is moving upward and stays there for some time only, then there is a chance to enter the market.
● 1/8 Line (Weak Level, Stop and Reverse): this is a weak level of support here. We can see the bounce-back of the price in the reverse direction quickly.
5. Admiral Pivot: This is a specially coded program for indicating support and resistance level and is used by professionals. It has many uses, such as S and R Scalping. S and R Breakouts, S and R Zones, and S and R indicators.
The support and resistance level in technical analysis plays a critical role in determining the selling and buying of underlying assets to profit from. Despite these two levels being quite reasonable to understand all by yourself, you cannot just use them and get lucky. You require to practice them to get accurate and perfect results. The results will determine how well you have learned both these levels.
Like every topic, discipline, rule, and method in the stock market, the support and resistance level in the technical analysis also demand your perseverance in understanding and execution.