Sunday, October 30, 2011

Trade with Support and Resistance

Resistance and Support
What is the meaning of resistance and support?
How to calculate resistance and support for trading and for investing?

In simple words the meaning of resistance is opposition.
As the name indicates, it opposes the share price going in upper direction.
It is the level where share price may stop before continuing its upper journey.

But if the buying starts from all sides then no resistance come into picture the resistance level is just broken and share price will continue its upward journey.

To break the resistance level volumes also play the major role.

If the share price moves above the resistance level with huge support of volumes then it is considered as confirm up trend.

Once the resistance is broken then the share moves till its next resistance level or go in consolidation (share movement with very less price variation) phase and then after getting appropriate buying with good support of volumes then it tries to break its next resistance level and will proceed and this continues.

The major bullish resistance is considered as 200 DMA (daily moving average)

As long as the share or index is trading above this level then it is considered as bullish or if share or index moves from bottom and breaks this level then further upside is confirmed and on the opposite side if the 200 DMA is broken from above then the down trend will continue and this is what happened with Nifty and Sensex when they broke their 200 DMA in January 2008.
Market has seen more then 60% fall after the broke of 200 DMA support level.

Resistance broken will act as support level (in case of moving average method)
You will come to know different types of calculating support and resistance.
Trade with Support and Resistance
Resistance and Support
What is the meaning of resistance and support?
How to calculate resistance and support for trading and for investing?
As the name indicates it provides support for to share price to prevent it from falling further.
If the share price starts falling then it is expected that it may take halt at its support level but if the selling and especially short selling is taking place then no support will comes into pictures.
If the selling pressure is from all sides then it may or may not take halt or wait near its support level and will continue its downward journey till it finds next support levels.

The resistance broken will act as its support level.

If a stock price is moving between support and resistance levels, then a basic investment strategy commonly
used by traders, is to buy a stock at support and sell at resistance, then short at resistance and cover

When judging entry and exit investment timing using support or resistance levels it is important to choose a
chart based on a price interval period that aligns with your trading strategy timeframe. Short term traders
 tend to use charts based on interval periods, such as 1 minute (i.e. the price of the security is plotted
on the chart every 1 minute), with longer term traders using price charts based on hourly, daily, weekly or
 monthly interval periods. Typically traders use shorter term interval charts when making a final decisions
 on when to invest, such as the following example based on 1 week of historical data with price plotted every
 15 minutes.

How to calculate the support and resistance levels?
There are many ways to calculate the resistance and support levels which is generally based on traders and investors strategies and trading and investing methods.

Following are few common methods used to find support and resistance.
1. Moving average based
2. Pivot point based.
3. Making higher highs and lower lows

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