I think you heard and read more about support and resistance. In intraday trading no indicator is superior to price.
In other words, all the so-called indicators are derivatives of price and volume. In this article we are going to read about the concept of support and resistance and how price varies at support and resistance.
- 1 What is support and resistance?
- 2 In terms of demand and supply
- 3 Initiative traders: The king makers
- 4 Retesting the support and resistance
- 5 The stoploss advantage.
- 6 Static & Dynamic support and resistance. Their relationship with time frames.
- 7 Static vs Dynamic support and resistance. Which one to choose?
What is support and resistance?
In simple words support and resistance is a zone where most of the treaders will be in a state of confusion whether to move the price in the same direction or to oppose the movement of price in that direction.
Based on its nature we name it as support and resistance. So, lets simplify the explanation now.
Support is a zone where there is more probability that the price may not move further downward.
On the other hand, resistance is a zone where there is more probability that the price may not move further upward.
Hence both support and resistance are the zones of barriers where the free movement of price is restricted.
Moreover, the zones of support and resistance are interchangeable. It means, once the price crosses a support, it becomes the resistance. Similarly, when the price crosses a resistance, it becomes the support.
Remember, support and resistance are not a singe price lines on the chart, instead they are the zones or a price range.
In terms of demand and supply
To simplify the explanation, we can also assume the same in terms of demand and supply.
Demand is a situation where there are more buyers to buy the stock at a particular price (thinking it as undervalued) at that point of time. In this scenario the buyers dominate the sellers, and you will find a rush in buy orders.
Similarly demand arises when sellers become reluctant to sell the stock even though buyers are same. This can lead to a pseudo demand situation.
On the other hand, supply is a situation where the sellers dominate the buyers thinking that the stock is overvalued at that point of time. Hence obviously, you will see a rush in sell orders at the terminal.
Similarly supply increases when the buyers become reluctant to buy the stock at present price. This is called pseudo supply.
So, after knowing the meanings of demand and supply, lets understand the support and resistance in terms of demand and supply.
Support is the “Zone of demand”, where buyers usually dominate the sellers. Hence whenever the price comes to the zone of support, we assume there to be a pullback upwards, as more buyers are interested to buy the stock at that level.
On the other hand, resistance is the zone of supply where, the sellers dominate the market and take over the change from buyers. As a result, whenever the price comes to the region of resistance, we assume a pullback downward.
Initiative traders: The king makers
The role of initiative traders is vital in the movement of price. These traders are the actual traders who trade with large volumes and make an initiation in the movement of price in one direction.
Moreover, the initiative traders are the rulers of support and resistance zones. They make the decision to make or break the support or resistance zones.
Let me explain with a simple scenario. In a normal intraday chart, we draw the zones of support and resistance based on the previous behaviour of the price.
That means previously, if the price finds a strict pull back at a particular level on the higher side, we call it resistance and in the same way a strict pullback on the lower side is called support.
There are 2 sets of novice traders trading at the zones of support and resistance. One set of traders wait for a pull back to go short at resistance and to go Long at the region of support. On the other hand, the second set of traders wait for breakout at the regions of support and resistance.
When the price reaches the zone of support or resistance, then the initiative traders come into play and move the price in their direction. Hence, they are called the king makers of price action.
If the initiative traders are in favour of the price momentum, they a breakout can happen. On the other hand, if they are not in favour of the present price momentum, then a pullback occurs, and the price takes a reverse path.
Hence, we cannot predict the movement of price at the region of support and resistance as the price can choose its own path. Of course, it is under the control of the initiative traders.
Retesting the support and resistance
Have you ever seen the price once after breaking the support or resistance, retests the barrier at least once?
Retesting is a sign which shows the strength of the momentum. Hence if the retesting fails to break the support or resistance once again, it means the momentum is weak and the price is supposed to move in the opposite direction.
On the other hand, if the retesting is successful in breaking the support and resistance, it shows the strength in the movement and the price moves in the intended direction.
The stoploss advantage.
Have you ever noticed the price showing increased momentum just after breaking or pullback from the support and resistance? The reason for this is because of hitting stoploss for a group of traders.
In the earlier scenario we have discussed about 2 sets of novice traders trading on the either side of support and resistance. Let us take the same scenario with a simpler outlook.
Let us think that group A novice traders are assuming a breakout at the region of resistance. Hence, they are thinking of going long when the price reaches the resistance zone. At the same time, they might have kept their stoploss just before the resistance zone.
when the price moves to the region of resistance, all the group A trader’s orders will be triggered, and they enter trade. But when the price fails to break the resistance and takes a pull back, then all the stoploss of the Group A traders will hit and you will see a sudden increase in supply.
The above picture shows a set of traders waiting for breakout. They usually keep their stoploss below zone of resistance. On the other hand another set of traders are waiting below zone of resistance. These traders usually keep stoploss above the zone of resistance. Hence at the region of support and resistance, we see rapid price movement due to continuous hitting of stoploss.
An intelligent trader captures this opportunity and always try to trade around support and resistance. Most of his entry points and exit points will be around support and resistance.
Static & Dynamic support and resistance. Their relationship with time frames.
Static support and resistance
Static support and resistance are usually seen in higher time frames like 1 hour and 30 minutes time frames.
The support and resistance at higher times frames are usually difficult to break. They provide strong boundaries for price movement. In simple words they are the strongest barriers for the price movement. The price finds difficulty in crossing these barriers.
Dynamic support and resistance
The dynamic S&R are commonly seen in 5 minutes and 2 minutes charts. They are dynamic in nature and are constantly changing their positions.
Dynamic support and resistance are very useful for scalpers. Even they provide good entry and exit indications to intraday traders.
On the other hand, dynamic zone of resistance and support is an area where the price fluctuates for few minutes. Finally, we see a breakout on one side, which continues the price movement.
Static vs Dynamic support and resistance. Which one to choose?
Both static and Dynamic provide good information during trading. Either it be intraday or scalping, both time frames are important. Hence drawing both dynamic and static time frames is a good practice.
Static support and resistance provide vital information on boundaries of the price movement. On the other hand, dynamic support and resistance provide information on entry and exit of your trades.
Hope this article provides an in-depth view on the terms of support and resistance. If you like the article, do share with your friends.