Support and resistance lines or levels are important and actionable concepts of technical analysis that help traders and investors determine the future price of stocks in the market.
Generally, prices are driven by the excesses of supply and demand. When demand is greater than supply, prices surge. At the same time, supply is greater than demand, and prices dip. At times, prices will move sideways considering both supply and demand are in equilibrium.
The concept of support and resistance states that the price of a stock tends to stop and move in the opposite direction as it reaches certain pre-determined price points.
Support line: This is a level at which the price of a stock or asset cannot decline any further. Often, the price will most likely bounce back and move up. This is a level at which the demand from buyers is expected to be significantly higher than that of sellers.
Resistance line: This is a level at which the price of a stock is not expected to surge any higher. This is a price point where there are more sellers than buyers in the market for a particular stock.
Above the current market price, resistance level often highlights as an indicator to sell. The resistance level is one of the key metrics on which market participants are focused in a rising market.
Simply put, support and resistance levels are opposite to each other. The support and resistance levels give a trader or investor an idea about the price movement of a stock. However, there is quite a possibility that the price of a stock breaks through these levels. In such a scenario, a new support and resistance level is created.
This means, in case the support level is breached, the price of a stock continues to dip until it reaches a new support level. And, in case the resistance level is breached, the price of a stock continues to surge, until it reaches a new resistance level.
Support and resistance levels aid traders or investors in identifying trends and undertaking trading decisions. However, support and resistance levels are only indicative in nature. There are several other factors that need to be considered before making the decision to buy or sell a particular stock.
So, a trader or investor is advised to be cautious when the price of a stock hits these levels as there is always high volatility around the support and resistance levels.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
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