SUPPORT AND RESISTANCE ACCURACY IN TRADING  

Almost all traders whether they are trading in intra day level, short term level or long  term level  rely on  the support and resistance  for making trading set ups. We say this because there are many chart evidence found in the stocks and forex market. Here we present the importance of support and resistance levels and how to draw them with various examples of charts.

Support 
Support is a level in chart where buyers halted the falling price of the stock by buying more and more. Generally buyers consider this price level is cheaper than before. Here buying pressure exceeds the selling pressure. The demand of the stock is more than the supply of the stock.

Resistance 
Resistance is a level in chart where sellers stopped the raising price of the stock by selling more and more. Here the selling pressure exceeds the buying pressure. The supply of the stock is more than the demand of the stock. Usually sellers consider this price level is costlier than before. These support and resistance levels are not exact lines in the stock charts. Some buying, selling may occur just above the level or just below the level. So instead of calling it as level we can call it as support zone and resistance zone.
Support zone and resistance zones ((S/R) zone) act as barriers for the bears and bulls respectively. Once the ((S/R) zone is broken the stock price will go on its way. So finding the ((S/R) zone is very important to make the entry and exit setups.
 After the breakout of resistance level, the resistance becomes support level for the future movement of price. Same like support level will become resistance level in future. The validity of ((S/R) zone should be tested both sides; support will become resistance and resistance will become support. A zone that tested on both sides proves to be strong and stable enough for extended period of time as support or as resistance.

How to draw support – resistance?
A support and resistant line should connect at least 2 lows or highs. They are usually drawn to connect double /triple highs or lows. Some times they are drawn on more than three lows/highs. An s/r line becomes much more valid with 3 or more touches that occur in a straight line.

Support –resistance with charts
Now we are going see the support and resistance levels in actual market with the help of chart.
Below you can see the first chart that is ONGC 90 minutes chart.
1A, 1C are support lines drawn on price around 1020 and 1155.  Both lines have two touches of price in the support line. The resistance lines drawn on price around 1055 and 1200 marked as 1B and 1D respectively. The resistance line 1B has 4 touches around the price level 1055.
After crossing the 1B resistance line the price went up to 1140.  Then the price got support from 1B line. The 1B resistance line now turns in to support line.
1D resistance line has 2 touches of around the price level 1200. After the breakout of the 1D resistance line the price makes the high of 1340.
 Here one more specialty is the previous high of 1230, which is   the line 1E acts like a support line for next price movement of ONGC.

The second one   is ESSOROIL daily chart
You can see the price of ESSOROIL starts from 2006 June to 2007 November. Here the support line 2A starts from July 06 to 07 November and drawn .on the price level Rs. 48 to 50.  Price ESSOROIL l touches the support line five times, giving more validity.  The 2B line which runs on the price level 63 is a resistant line. It resisted the price four times.

The third chart is also ESSOROIL, but the price coverage starts from June 2006 to May 2010.  Around 2007 November the price breakout the 2B resistant line and reached Rs. 340 level within two months.  It is marked in chart by red arrow.
That is the beauty of technical analysis; once the resistant line is broken the price will go on its way. Now the 2B resistant line turns into support line. At the end of 2008 to the beginning of 2009, the price got support from the 2B line which acted as resistance line throughout 2007.  Now the 2B line has more validity. So the price level 63 in ESSOROIL will be the strong support zone for extended future.

The fourth chart is HCL INFO, which covers from AUG 2009 to July 2010.
3A resistant line is drawn on the price level at 168. Support line 3B is drawn on the price level at 143. Around 2010 Jan, the price breakdown the 3B support line. The price falls up to 128 levels before bounce back. The previous support line 3A now turns in to resistant line at 143 price level. The 128 price level acts like support line 3C. Again the 3C support line breakdown by the price. Same like 3B line, the 3C support line turns into resistant line.

Conclusion
A support zone is defensive wall for the bull side traders and investors. A resistance zone is defensive wall for the bear side traders and investors. Both parties always try to safeguard the walls. If the resistance wall broken, Bulls will be victorious. Bear will be victorious if they broke the support walls. That is the beauty of S/R zones. Yes it gives the traders and investors the decisive edge in trading.


The author MAHENDRAVARMAN.MA is one among the technical analysts, and the head of the risk management team in traderangers.com.  As a trader and technical analyst, he has wide experience in Forex market and Indian stock market.