Technical Analysis is one of the approaches used to invest or trade in the stock market. And why not, because by learning technical analysis a trader gets equipped with charting and market psychology that helps him not only select profitable bids but also to avoid less appealing or wrong ones.
We have briefly explained Technical Analysis, it’s key assumption and basic terms like charts, OHLC, Time Frame, Technical Indicators, Candle-stick Patterns, Volume, Support and Resistance in one of our previous articles called Technical Analysis – An Overview.
Link for the same is https://www.balancingaf.com/post/technical-analysis-an-overview. The article covered the basic theoretical approach of Technical Analysis whereas we will be focussing more on the practical approach of the same.
Let’s discuss and understand a few more common terms you might have heard about technical analysis–
Trend – A trend is nothing but the direction of the overall market. So how does a trend end? Let’s assume, the stock is in an uptrend and making higher high and higher lows as shown in the above image, as soon as the stock moves below its previous low i.e. it forms a lower low, the trend is broken.
Support - Support is something that prevents the price from falling further. The support level is a price point on the chart where the trader expects maximum demand (in terms of buying) coming into the stock/index. Whenever the price falls to the support line, it is likely to bounce back. The support level is always below the current market price. Let’s look at what support looks like on a chart and understand why stock bounces from a particular price level.
Bharti Airtel (Time frame – 8 Years, Weekly Chart)
As you can see in the above chart, the share price of Rs. 280 is acting as a support for the security, 5 times the stock prices has managed to bounce from the same level of price, hence this level acts like a “Floor” preventing the price to fall below it.
Resistance - Resistance is something which stops the price from rising further. The resistance level is a price point on the chart where traders expect maximum supply (in terms of selling) for the stock/index. The resistance level is always above the current market price.
Let’s look at what resistance looks like on a chart and how the stock price struggles to rise above it and see the selling pressure at that level.
Tata Consultancy Services (Time frame – 5 Years, Weekly)
As you can see in the above chart, the price level of Rs. 2290-2300 is acting as a resistance for the security, 5 times the stock prices has tried to break the same level of price, but couldn’t. Hence, this level acts like a “Ceiling” preventing the price to rise above it.
By now, we have a much clear understanding of Trend, Support and Resistance but the BIG QUESTIONS-
• How do I trade when along S&R?
• What to do if a support breaks and the price falls below it?
• Or What to do if the share prices go above the resistance levels?
To help you understand how to play support and resistance levels, we will share an Order of play to take a position in security –
This image will help you understand what to do near the support or resistance levels.
Technical Analysis is a very broad topic and we will try to cover more of it in our further blogs, as of now, for better understanding, you can try to mark your own levels on the following charts –
Support – 1. State Bank of India (Time frame – 8 Years, Weekly Chart)
2. ICICI Bank (Time frame – 4 Months, 4 Hours Chart)
Resistance – 1. Reliance Infrastructure (Time frame – 5 Years, Weekly Chart)
2. Titan (Time frame – 4 Months, 4 Hours Chart)
Chart and Image credits: Mr. Saif Thobani, Technical Analysis Head Faculty at LeapUp Edutech
Disclaimer: The data and charts presented are purely for educational purpose and do not imply any investment recommendation.
Write-up by: Nikhil Mahanandani
Very precisely explained!