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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