The world of investments can be quite perilous and it constantly demands the investors to be smart and sensible about their decisions. It is, hence, prudent to keep a close eye on the movements and trend of the market and use them to make better informed decisions and avoiding sticky situations. Technical analysis can be immensely useful, in this regards, as it helps you to statistically analyze the price movement of an asset.
Technical analysis may seem quite complicated for a new trader but it basically is the study of recurring patterns that results from changes in supply and demand. Asset prices will move up when demand is stronger than supply since buyers will be willing to buy more than what the sellers are looking to sell. Hence, in order to entice the suppliers, the buyers will offer a higher price resulting in the overall price to increase. The same is true for the other direction as well when supply is more than demand. The overall price will fall as sellers will be forced to lower the price to sell. These imbalances in supply and demand also give rise to support and resistance levels, which act as barriers to price movement.
Support and Resistance
Support and resistance level are points that the price of an asset struggle to move beyond. At the support level, there will be an influx of buyers as they will deem that price point as quite attractive. This will lead to the support level to act as a price floor since they restrict the asset’s price to fall below that point. On the other hand, at the resistance level, there will be a lot of sellers willing to sell and hence, restricting the asset’s price to move beyond that point. The resistance point, therefore, acts the price ceiling.
The knowledge of the concept of support and resistance level can bolster your investment strategy and aid you immensely in effectively planning your trade.
Buy and Sell Timing
You can vastly improve the quality of your trades by using support and resistance level. Usually, a good time to buy an asset is when it is near the support point. Similarly, if you want to sell, you should wait for the asset to reach near the resistance level before doing so.
However, if you are in a situation that is not so clear cut, you can analyze the price action near support and resistance levels to get a better idea of the movement and use that action to augment your trading strategy.
Determining the Trend
The most important application of the principle of support and resistance levels is that that it will help you understand the overall trend. An asset will not oscillate between support and resistance levels. If the overall trend of the market is bullish, the stock will break its resistance point.
Once an asset is able to break a resistance point, that point becomes a support point in an upward trend. Furthermore, the support levels will hold out in an upward trend where as resistance levels will keep on breaking. In a down trend, the opposite is true.
Stop loss to mitigate risk
Thirdly, you should use a stop loss order to manage your risk. This should be done around the support level so that you are not caught out when the asset price takes a downward spiral.
The knowledge of support and resistance can truly augment your day trading strategy and improve your overall, trade quality.