If you are a technical trader then there is no way you can manage without understanding supports and resistances of stocks and indices. Support and resistance are two of the most basic concepts in technical analysis, in that they help you plot the approximate price points where you should put your buy order, the long side stop loss, the sell order and the short side stop loss. Typically, supports and resistances become more useful for trading decision making when they are used in conjunction with volumes. Price alone can only tell you so much! You can already use them to make trading decisions, but they also form the foundation of more complex strategies and trading systems. In fact, when you get to doing hard core technical analysis, it is the understanding of supports and resistances that will really hold you in good stead.

Let us dwell on supports first. A support is created by a confluence of psychological factors and is a price where people do not expect to breach on the downside. This could be due to past experience or the power of round numbers. Support is the price that, historically, a stock has had difficulty falling below. This is the point where the market considers the price to be “cheap”. As a result, this is the level at which the demand tends to get clustered and even the sceptics start seeing value in the stock at these price levels. Demand becomes so strong that it stops the price from going any lower. Typically, a strong support gets created when the price consistently hits a particular level and keeps bouncing and it is this bounce that gradually builds confidence about the efficacy of the support level.

Let us now turn to the resistance price for a stock. A resistance is also created by a confluence of psychological factors and is a price where people do not expect to breach on the upside. Unlike a support that is more built on hope and optimism, the resistances are based more on fear and caution. This could be due to past experience or the power of round numbers. For example, Nifty faces resistance at 11,000 as that is the level when most traders get sceptical about its ability to go up further. Resistance is the price that, historically, a stock has had difficulty breaking above. This is the point where the market considers the price to be really expensive. As a result, resistance is the level at which the supply of the stock tends to get clustered and even the hard core optimists and the bulls tend to turn a tad cautious at these price levels. As a result, the supply becomes so strong that it stops the price from going any higher. Typically, a strong resistance gets created when the price consistently hits a particular level and keeps falling back and it is this movement that gradually builds fear and caution about the efficacy of the resistance level.

However, there is a word of caution here. Support and resistance levels are not always precise and they can be broken, but it’s a simple and proven concept that many find useful. So, there is nothing really sacrosanct about it. Under normal and regular market conditions these supports and resistances work pretty well, and hence become an important tool for traders. When the support or resistance is regularly tested and finally broker, it is called a break out and sets the tone for a new trend shift. The basic rule when trading using support and resistance is to buy on support and sell on resistance. Ideally your stop loss should be placed below the support in case of buy trades and above the resistance level in case of sell trades.