How to Draw Support and Resistance Levels TUTORIAL

While discussing candlestick patterns, we had learnt nigh the entry and the stoploss points. However, the target price was not discussed. We will hash out the same in this chapter.

The best mode to identify the target price is to identify the support and resistance points. The back up and resistance (S&R) are specific price points on a chart expected to attract the maximum amount of either ownership or selling. The back up price is a cost at which one can look more buyers than sellers. As well, the resistance price is a price at which one can expect more sellers than buyers.

On a standalone basis, traders can use Southward&R to place trade entry points also.

11.ane – The Resistance

As the name suggests, resistance is something which stops the price from rising further. The resistance level is a price indicate on the chart where traders expect maximum supply (in terms of selling) for the stock/alphabetize. The resistance level is always to a higher place the current market price.

The likelihood of the price rising to the resistance level, consolidating, arresting all the supply, and declining is high. The resistance is one of the disquisitional technical assay tools which market participants expect at in a rising market. The resistance oft acts as a trigger to sell.

Here is the chart of Ambuja Cements Limited. The horizontal line coinciding at Rs.215 on the chart, marks the resistance level for Ambuja Cements.

I have deliberately compressed the chart to include more information points, the reasons for which I will shortly explain. But before that there are two things that you need to pay attending to while looking at the higher up chart:

1. The resistance level, indicated by a horizontal line, is higher than the electric current market cost.
2. While the resistance level is at 215, the electric current candle is at 206.75. The current candle and its corresponding price level are encircled for your reference

For a moment allow us imagine Ambuja cement at Rs.206 forming a bullish marubuzo with a low of 202. We know this is a signal to initiate a long merchandise, and we too know that the stoploss for this trade is at 202. With the new-plant knowledge on resistance, nosotros now know that we tin set up 215 every bit a possible target for this trade!

Why 215 you may wonder? The reasons are elementary:-

1. The resistance of 215 implies in that location is a likelihood of excess supply.
2. Backlog supply builds selling pressure.
3. Selling pressure tends to drag the prices lower.

Hence for reasons stated above, when a trader is long, he can look at resistance points to gear up targets and to set exit points for the trade.

Besides, with the identification of the resistance, the long trade can now be completely designed as follows:

Entry – 206, Stoploss – 202, and Target – 215.

The next obvious question is, how do we identify the resistance level? Identifying price points as either a support or resistance is extremely simple. The identification process is the same for both support and resistance. If the current market place price is below the identified point, it is called a resistance signal; else information technology is called a support signal.

Since the process is the same, permit the states proceed to understand 'back up', and we will follow information technology up with the procedure to identify S&R.

11.two – The Support

Having learnt about resistance, understanding the support level should exist quite unproblematic and intuitive. Equally the name suggests, support is something that prevents the cost from falling farther. The back up level is a price indicate on the nautical chart where the trader expects maximum demand (in terms of ownership) coming into the stock/alphabetize. Whenever the cost falls to the support line, it is likely to bounciness back. The support level is always below the electric current market place cost.

There is a maximum likelihood that the cost could fall until the back up, consolidate, absorb all the demand, and so start moving upwardly. The support is one of the disquisitional technical level marketplace participants look for in a falling market. The back up often acts as a trigger to buy.

Hither is the chart of Cipla Limited. The horizontal line congruent at 435 on the nautical chart marks the support level for Cipla.

Few things that you need to find on the chart above:

1. The back up level, indicated past the horizontal line is below the current market price.
2. While the support level is at 435, the current candle is at 442.v. The current candle and its corresponding price level are encircled for your reference

Like we did while understanding resistance, let us imagine a bearish pattern formation – perhaps a shooting star at 442 with a high of 446. Clearly, with a meteor,  the call is likewise curt Cipla at 442, with 446 equally the stoploss. Since we know 435 the immediate support, we tin can prepare the target at 435.

And so what makes Rs.435 target worthy? The following reasons dorsum the decision:

1. Support at 435 implies there is a maximum probable hood of excess need to emerge.
2. Excess demand builds buying pressure.
3. Buying force per unit area tends to drag the price higher.

Hence for the reasons stated in a higher place, when a trader is brusque, he can look at support points to prepare targets and to set exit points for the trade.

Also, with the identification of the support, the short trade is now completely designed.

Entry – 442, stoploss – 446, and target – 435.

eleven.3 – Structure/Drawing of the Back up and Resistance level

Hither is a 4 step guide to help you understand how to place and construct the support and the resistance line.

Step 1) Load data points – If the objective is to identify short term South&R load at least 3-6 months of data points. If you want to identify long term S&R, load at least 12 – 18 months of data points. When you load many information points, the nautical chart looks compressed. This likewise explains why the above two charts await squeezed.

1. Long term S&R – is useful for swing trading.
2. Short term S&R – is useful intraday and BTST trades.

Hither is a chart where I have loaded 12 months of data points

Stride two) Identify at least 3 price action zones – A price activeness zone can be described every bit 'sticky points' on the nautical chart where the toll has displayed at least one of the behaviours:

1. Hesitated to move upwards farther later on a brief up move
2. Hesitated to move downwardly further afterward a brief down move
3. Sharp reversals at a item price point

Hither are a series of charts that identifies the above 3 points in the aforementioned guild:

In the chart below, the encircled points signal the price hesitating to movement upwardly further subsequently a cursory upwards motion:

In the chart beneath, the encircled points indicate the cost hesitating to motility downwards further afterwards a brief downwardly move:

In the chart below, the encircled points indicate sharp price reversals:

Step 3) Align the price activity zones – When you look at a 12-month nautical chart, it is common to spot many price action zones. Simply the play a trick on is to identify at least 3 toll action zones at the same price level.

For case here is a chart where two price action zones are identified, but they are not at the same price bespeak.

Look at the following chart, I have encircled 3 price action zones that are around the same price points:

A disquisitional point to note while identifying these toll action zones is to make certain these price zones are well spaced in time. Meaning, if the 1^st toll action zone is identified on 2^nd week on May, then information technology volition be meaningful to identify the two^nd price action zone at any point after four^th week of May (well spaced in time). The more distance between two price action zones, the more than powerful is the Due south&R identification.

Pace four) Fit a horizontal line – Connect the three price action zones with a horizontal line. Based on where this line fits in concerning the current market price, it either becomes support or resistance.

Have a look at this chart

Starting from left:

1. The 1st circle highlights a price action zone where there is a sharp reversal of toll.
2. The 2nd circle highlights a cost action zone where the cost is glutinous.
3. The 3^rd circle highlights a toll action zone where there is a precipitous reversal of cost.
4. The iv^th circle highlights a price action zone where the price is viscous.
5. The five^th circle highlights the electric current marketplace price of Cipla – 442.5

In the to a higher place chart, all the four toll action zones are around the aforementioned price points, i.e. at 429. Clearly, the horizontal line is below the current marketplace price of 442.5, making 429 an immediate support price for Cipla.

Please notation that whenever you run a visual exercise in Technical Analysis such as identifying S&R, you run the approximation risk. Hence always requite room for error. The price level is usually depicted in a range and not at a unmarried price bespeak. Information technology is actually a zone or an area that acts every bit support or resistance.

Going by the above logic, I would be happy to consider a price range around 426 to 432 as a support region for Cipla. At that place is no specific rule for this range; I simply subtracted and added three points to 429 to get my price range for the back up!

Hither is some other chart, where both S&R have been identified for Ambuja Cements Express.

The current price of Ambuja is 204.1, the support is identified at 201 (below electric current market price), and the resistance at 214 (above current market place toll). So if one were too short Ambuja at 204, the target, based on support, can be at 201. Probably this would be a adept intraday merchandise. For a trader going long at 204, 214 tin be a reasonable target expectation based on resistance.

Detect in both the support and the resistance level, in that location at least 3 toll action zone identified at the price level, all of which are well spaced in time.

eleven.4 – Reliability of Due south&R

The back up and resistance lines are only indicative of a possible reversal of prices. They past no means should exist taken for ascertain. Like anything else in technical analysis, one should weigh the possibility of an event occurring (based on patterns) in terms of probability.

For example, based on the chart of Ambuja Cements –

Current Marketplace Cost = 204
Resistance = 214

The expectation here is that if Ambuja cement starts to motility up at all, it is probable to confront resistance at 214. Meaning, at 214 sellers could emerge who can potentially drag the prices lower. What is the guarantee that the sellers would come in at 214? In other words, what is the dependence of the resistance line? Honestly, your guess is as good as mine.

Nevertheless, historically it tin be seen that whenever Ambuja reached 214, information technology reacted in a peculiar way leading to the formation of a cost action zone. The comforting factor here is that the price action zone is well spaced in time. This mean 214 stands as a time tested price action zone. Therefore keeping the very first rule of technical analysis in perspective, i.eastward. "History tends to repeat itself" we go with the belief that support and resistance levels will be reasonably honoured.

Purely from my personal trading experience, well constructed S&R points are usually well respected.

11.5 – Optimization and checklist

Perhaps, we are now at the near important juncture in this module. We will start discovering a few optimization techniques which will help us identify high-quality trades. Remember, when you seek quality, quantity is always compromised, but this is a compromise that is worth making. The idea is to place quality trading signals as opposed to identifying plenty simply worthless trades.

Optimization, in general, is a technique wherein you fine-tune a procedure for best possible results. The process in this context is well-nigh identifying trades.

Allow us go back to candlesticks patterns, maybe to the very get-go we learnt – bullish marubuzo. A bullish marubuzo suggests a long trade most the close of the marubuzo, with the low of the marubuzo acting as the stoploss.

Assume the following credentials for the bullish marubuzo:

Open = 432, High = 449, Low = 430, Close = 448

Hence the entry for the long trade is approximately at 448, with 430 every bit the stoploss.

Now, what if the low of the marubuzo besides coincides with a expert time tested support? Do yous meet a remarkable confluence of two technical theories here?

Nosotros take a double confirmation to become long. Retrieve nigh it on the following terms:

1. A recognized candlestick pattern (bullish marubuzo) suggests the trader initiate a long trade.
2. Support near the stoploss cost suggests the trader the presence of significant buying interest around the depression.

While dealing with a fairly random environment such every bit the markets, what a trader really needs is a well-crafted trade setup. The occurrence of the higher up ii weather (marubuzo + support near the depression) suggests the same action, i.e. to initiate a long merchandise in this instance.

This leads us to an important idea. What if we had a checklist (telephone call information technology a framework if y'all like) for every trade we consider? The checklist would act as a guiding principle earlier initiating a trade. The trade should comply with the weather condition specified in the checklist. If it does, we take the merchandise; else we drop it and wait for some other trade opportunity that complies with the checklist.

Discipline, they say makes up for the 80% of the trader'south success. In my opinion, the checklist forces yous to be disciplined; information technology helps you avoid taking an precipitous and reckless trading decision.

In fact, to begin with, we have the first two disquisitional factors of the checklist:

1. The stock should form a recognizable candlestick pattern.
   1. Note: Nosotros accept learnt some of the popular patterns in this module. To begin with, you can use only these patterns to comply with the checklist
2. South&R should confirm to the trade. The stoploss toll should be around Southward&R.
   1. For a long merchandise, the depression of the design should be around the back up.
   2. For a curt merchandise, the loftier of the pattern should be around the resistance.

From now on in this module, as and when nosotros learn new TA concepts, we volition build this checklist. But to quench your marvel, the final checklist will have six checklist points. In fact, when we take the grand 6 checklist points, we will weigh down each ane of them. For case, checklist signal number iv may not exist as important as point number 1, only it is more important than 100 other factors that distract the trader.

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Fundamental takeaways from this chapter

1. S&R are price points on the chart
2. Back up is a price indicate below the current marketplace price that indicate buying interest.
3. Resistance is a cost point to a higher place the electric current market price that bespeak selling interest.
4. To identify South&R, place a horizontal line in such a manner that information technology connects at least 3 price activeness zones, well-spaced in time. The more than number of price activeness zones (well spaced in time) the horizontal line connects, the stronger is S&R
5. S&R can be used to place targets for the trade. For a long trade, look for the firsthand resistance level as the target. For a short trade, look for the firsthand support level every bit the target.
6. Lastly, comply with the checklist for optimal trading results

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How to Draw Support and Resistance Levels TUTORIAL

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