Chapter 13: What are Supports & Resistances? (Part 2)
Chapter 13 - What are Supports & Resistances (Part II)?
In our discussion in the last chapter, we talked about and understood the concept of supports and how they can be used to identify targets for short (sell) trades and can also be used as an indicator for entering fresh long positions in the market. Now through our discussion here we will try to understand the other side of the S&R coin i.e, Resistance. If Supports are means to find targets for short (sell) trades, then resistances are those points where the profit for long (buy) trades can be booked.
What are Resistances?
The general meaning of the word Resistance is something that is difficult to breach. And in the world of trading and investment, resistance is understood as the zone of supply. It is a point beyond which the market finds it difficult to continue with its buying momentum without facing stiff competition from sellers. And supply is expected to increase and selling is expected to come back in the market. It is also the first level of target for long positions in the market. And if the market breaches these levels of resistance, then the next level of resistance comes into the picture. These (Resistance) are the points at which the maximum buying absorption happens in the market.
Let us illustrate and understand the concept of resistance with the help of an example:
The chart above is the daily chart of TCS And we see stiff resistance being marked around 2300 levels. And, now it (2300) becomes a very important Pivot level in the market. As and when the market goes to the 2300 level, we see selling pressure coming in the market and profit-booking by longs (existing) can also be seen here. All the circled points in the chart above provide an opportunity to book profits and execute fresh short positions in the market.
How to identify trades using Resistances?
The expectation from the trade decides the kind of trade which one can take from one particular kind of resistance. The logic used here is the same which we applied while understanding support.
- If one is looking for short term trades like intraday or STBT (sell today, buy tomorrow), when one is looking to take trades with medium strength resistance.
- But, if one is looking for swing trades, then the resistance for those kinds of trade has to be a stronger one as these are long-duration trades.
The authenticity of Supports and Resistance levels:
This is the most conflicting point amongst all the traders is, how one believes or trusts the results or indications shown by the S&R level?
The answer lies in the simple fact that these levels have been formed or constructed with a lot of time being spent by the market at these levels. A lot of volume and price action is associated with these levels. These are generally the point of inflection in the market. Break up or break down from these levels could mean the next levels coming into the picture. These levels can also be associated with milestone points in the market.
The following are some of the key points which one need to understand while taking trades based on certain indications given by Support and Resistance levels:
- Time Spent - The time spent at the level of Support and Resistance is of utmost importance. If the time spent is substantial enough and it is more than the time spent at any other levels, we can be rest assured that the level is of prime importance.
- Volume - This is probably a more important factor than time spent. If the volume at the level where a substantial amount of time is spent is on the higher side, then we can easily say that there is a lot of buying and selling interest at those levels and break above or break below can make it support and Resistance levels respectively.
- Supports and Resistances are important points of significance on charts
- Supports are defended by bulls/buyers and resistances are defended by bears/sellers
- Supports and Resistances can be used to identify targets for the trade.
- For a long trade, look for the immediate resistance level as a target.
- For a short trade, look for the immediate support level as a target.