Investment Education: What is Support and Resistance?

The price of a stock in the stock market does not always go straight up or straight down. Sometimes it increases, sometimes it decreases, sometimes it stays in the same range for some time. Investors often use two terms to understand this price movement—support and resistance. A support is a price zone that is repeatedly stopped or returned to when the share price is falling. Simply put, when a stock goes down, the area where buyers begin to increase and the price tries to move back up is called support.

For example, if the price of a stock has repeatedly reached around Rs 450 and then bounced back, investors can look at the Rs 450 area as support. This does not necessarily mean that the stock will rise after reaching 450, but it is an indication that there has been demand in that price area in the past. Resistance is a price area that has repeatedly stopped or returned to as the stock price moves higher. In simple terms, the area where a stock is going up is called the resistance, where the sellers increase and it becomes difficult for the price to go up.

Let's say a stock goes up to Rs 520 time and time again but cannot sustain above that. In that case Rs 520 area can be considered as resistance. This does not mean that 520 will never go above, but it does mean that there has been selling pressure in that price area before. Support and resistance are not just fixed points, but often price zones. For example, rather than saying that Rs.450 is support, it is more practical to say that Rs.445 to Rs.455 can be support. As the price in the market is determined by supply and demand, it is natural for some rupees to go down.

Why support? When many investors see a price as cheap, there may be an increase in buy orders. Even old investors may not be in a hurry to sell because "shares may come back from here". This may prevent the price from going down for a while. This is why the area looks like support. Why is resistance created? When many investors find a price too expensive, or when investors who previously bought at that price start selling when they get an opportunity, selling pressure increases. This can prevent the price from going up. Such an area is seen as resistance.

What happens if the support is broken? If the share price falls below the support with strong trading, it can be considered as a sign of weakness. This may mean that buyers are not as strong as they used to be in that price zone. In such a case, the price may move further down to find another support. What happens if the resistance is broken? If the share price sustains above the resistance with strong trading, it is considered a positive signal. This may mean that the selling pressure is being overtaken by buyers. Then there is a possibility that the previous resistance will become the new support.

But support and resistance should not be taken as 100 percent accurate signals. There are also false breakouts and false breakdowns in the market. Sometimes the stock seems to go above the resistance but after a while it comes down again. Similarly, even if the support appears to be broken, the price may return higher later. So making a decision just by looking at the line is risky. When using support and resistance, you should also look at the trading amount, i.e. volume. A breakout can be considered a little more convincing if the volume is strong when the resistance moves up. But if the price goes up, the volume is weak, the move may not be sustainable. Similarly, if there is a large volume after breaking the support, it can be an indication that the selling pressure is strong.

New investors should not blindly buy at support and blindly sell at resistance. When the price reaches the support, the decision should be made only by looking at the company's condition, market sentiment, volume and risk capacity. The decision whether to sell or hold a stock that has reached resistance should also be based on your goals and the company's fundamentals. Support and resistance are used more in short-term trading. For long-term investors, the company's financial condition, business, profitability, debt, dividend potential and management are more important. Stocks of good companies may break support in the short term, and shares of weak companies may rise after breaking resistance for a while.

In simple terms, support is a potential area to hold on to when the price goes down, and resistance is a potential area to stop when the price goes up. Both of these show the psychology of buyers and sellers in the market. But these are not magic formulas for telling the future, just hints to aid in decision-making.