The most suitable way to identify a stock’s target price is to determine its support and resistance levels. Support and resistance points are specific price points on a chart expected to attract the maximum amount of buying or selling.
The support price is a price at which one can expect more buyers. Likewise, the resistance price is a price at which one can expect more sellers. Investors, on a standalone basis, can use support and resistance levels to identify trade entry points. Support and resistance are such tools in the financial market that can help you anticipate the movement of share price in the market, be it Nifty Metal or Nifty Bank.
What is Support?
Support is the level at which demand for a stock is strong enough to stop its price from falling any further. Each time the stock’s price reaches its support level, it becomes difficult to penetrate. The rationale is that as the price drops and approaches support, buyers’ demand for the stock becomes more inclined to buy while sellers’ supply becomes less willing to sell.
What is Resistance?
Resistance is the level at which supply is strong enough to keep the stock’s price from increasing. Each time the price reaches resistance, it becomes difficult for it to move higher. The rationale behind this is that as the price rises and approaches resistance, sellers’ supply becomes more inclined to sell, and buyers’ demand becomes less willing to buy.
Ways to Identify Support and Resistance Levels
Support and Resistance levels are significant in all types of indices be it Nifty 50 or Nifty 500. Below are a few ways to identify support and resistance levels that can help you choose the best time to enter a market, as well as when to exit the market:
Historical Price Data
The most reliable source for identifying support and resistance levels is historical prices, which can be used to recognise a past pattern if it appears again. However, it is also important to note that past patterns may have formed under different circumstances.
Previous Support and Resistance Levels
You can use previous notable support and resistance levels as possible entry and exit points and indicators of future movement. However, it is unusual for a market to hit the same price repeatedly before reversing.
Technical Indicators
Technical indicators provide dynamic support and resistance levels that move as the chart progresses. Support and resistance levels for different markets will be based on different factors. Hence, it is important to practise identifying support or resistance levels using historical charts.
Ways to Draw Support and Resistance Lines
To draw support and resistance lines on a chart, the following methods need to be established to determine their strength:
Peaks and Troughs
To draw lines using peaks and troughs, select the timeframe, then identify the highest peak on the chart and do the same with the lowest point. If there is a downtrend, the support level will be the lower-low peak, and the resistance level will be the lower-high peak. Conversely, if there is an uptrend, the support level will be the higher-low peak, and the resistance level will be the higher-high peak.
Moving averages
The moving average indicator is another way to identify a stock’s support and resistance levels and draw them on a chart. Draw a diagonal line with the help of an indicator from the highest peak to the lowest peak to see which way the trend is moving. If the trendline moves up, the average line will be the support and vice versa.
Trend Lines
To have a usable trend line, it is important to ensure that there are at least three peaks or three troughs while drawing trend lines. Then, plot the trend lines onto a chart, where the uptrend line will be the support level, while the downtrend line will be the resistance level.
Conclusion
Support and resistance levels are two important points in time where the forces of supply and demand meet. Technical analysts trace these support and resistance levels to determine market psychology, supply, and demand. Using support and resistance levels as a trading strategy is one of the basic methods of trading.
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