Support and Resistance

Introduction

Support and resistance are the most important concepts in technical analysis. If you understand only one thing about charts, understand this. Almost every swing trading strategy is built on buying near support and selling near resistance.

What is Support?

Support is a price level where a falling stock tends to stop and bounce back. At this level, buyers believe the stock is cheap and start buying. Think of support as a floor.

What is Resistance?

Resistance is a price level where a rising stock tends to stop and fall back. At this level, sellers believe the stock is expensive and start selling. Think of resistance as a ceiling.

Why Do These Levels Work?

Markets have memory. If many people bought a stock at Rs 250 and it went up, they remember Rs 250 as a good price. When it comes back there, they buy again. Similarly, people who bought at Rs 280 and saw losses want to sell when the price returns to Rs 280 so they can exit at breakeven. This repeated behaviour creates support and resistance.

The Trading Range

The space between support and resistance is called the trading range. Many stocks stay in a range for weeks or months. Swing traders buy near the bottom of the range and sell near the top.

Example: Trading a Range

GHI Ltd has moved between Rs 250 and Rs 280 for three months. It touched Rs 250 three times and bounced each time. It touched Rs 280 twice and fell each time.

• Support: Rs 250
• Resistance: Rs 280
• Trade plan: buy near Rs 252, stop-loss at Rs 244, target Rs 276.
• Risk: Rs 8 per share. Reward: Rs 24 per share. Risk-reward = 1:3.

Breakout

When the price closes above resistance with strong volume, it is called a breakout. It shows buyers are strong enough to beat the sellers. After a breakout, the old resistance often becomes the new support.

Example: GHI Ltd closes at Rs 290 with twice the normal volume. Rs 280 may now act as support. A pullback to Rs 282 could be a buying opportunity.

Breakdown

When the price closes below support, it is a breakdown. Sellers have won. The old support often becomes the new resistance. Buyers should avoid the stock or exit.

How to Draw Support and Resistance

• Open a daily chart covering 3 to 6 months.
• Find price levels where the stock turned at least 2 to 3 times.
• Draw horizontal lines at these levels.
• Treat them as zones, not exact numbers. Rs 248 to Rs 252 is a support zone.
• The more times a level is tested, the more important it becomes.

Other Types of Support and Resistance

• Round numbers: Rs 100, Rs 500, Rs 1,000 often act as psychological levels.
• Moving averages: the 50-day and 200-day averages often act as dynamic support in uptrends.
• Previous highs and lows: 52-week highs and lows are watched closely by traders.

Common Mistakes

• Buying at resistance hoping for a breakout.
• Trusting a breakout that happens with low volume.
• Placing a stop-loss exactly at support, where it is easily hit. Place it slightly below.

On GoPocket

Open the chart of every stock in your GoPocket watchlist and note its key support and resistance levels in your trading journal. Update them every weekend.

Frequently Asked Questions

Which timeframe should I use?

Swing traders mainly use daily charts, and weekly charts to see the bigger picture.

Can support break?

Yes. That is why a stop-loss is always needed.

Key Takeaways

• Support is the floor, resistance is the ceiling.
• Buy near support, sell near resistance.
• Confirm breakouts with volume.

Disclaimer: Hypothetical example for learning only.