Resistance and Support are important levels or important prices in a particular asset where buyers and sellers are interested in buying or selling the asset. These support and resistance are identified by a technical analyst to determine the balance and imbalances between buyers and sellers at that level.
What is Support in the Stock Market?
A support also known as demand area refers to a level where buyers want to buy a particular asset at a particular price. A support can be identified by checking the previous history data of an asset. If the price of an asset has touched down a certain area multiple times and took a reversal from that price can be called a support or a demand area.
The psychology behind this action indicates that the buyers are ready to buy a certain asset at a given particular price and willing to pay that price for that asset.
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What is Resistance in the Stock Market?
A resistance also known as supply area refers to a level where buyers are not interested to pay a certain price for an asset and where sellers are willing to sell an asset can be called a resistance. In order to identify a resistance or a supply area you need to check the historical data of an asset. Look for those areas where price approaches and rejects from that certain level.
The logic behind this phenomena is that the buyers are not interested to pay a certain price for an asset but sellers are selling their assets at higher prices. Due to this imbalance and aggressive selling from sellers causes a price to reject from a certain level which acts as a resistance.
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Resistance and Support- Reversal in Nature
A major concept of technical analysis states that once a resistance or a support is broken, it causes a change in their nature. In simple terms, when a support is broken, the following level will act as resistance. Similarly, once a resistance is broken it will act as a support to a price.
Understanding Resistance and Support with the Help of an Example-
Let’s try to understand Resistance and Support with the help of an example which will assist you to understand the concept in detail,
First let’s assume that there are buyers who have bought a stock at the price levels of $100 and the current price of the stock has reached the price of $150. This will create a happy emotion in the mind of the buyers and they will want to buy more at the price of $100. They decided to buy more quantity of this stock at the price of $100.
Let’s take another group of investors who wanted to purchase this stock at the price of $100 but never bought the stock. Once the price reached $150 they regretted their decision and wanted to buy this stock at the level of $100. This will again create demand in the market at the level of $100.
The third group of investors, say bought the stock at the lower levels, let’s say, $50. These investors sold their stock at the price of $100 but since the price reached the levels of $150, they wanted to re-create their long positions at the level of $100 (at their selling price). This will again create more demand at the levels of $100 in the market.
Now to understand the working of a Resistance, take all the above participants bought the stock at the levels of $100. The price of the stock reaches the level of $150 and the entire group did not sell the stock at the level of $150 and now the price reaches back to their buying price of $100. This will create regret in the minds of the investors. Suppose, the price reaches the level of $150 this time, investors will sell all their quantity at the price of $150 which will lead prices to reject from the levels of $150. This will create a Resistance at the level of $150.
Conclusion
Technical analysis is a huge concept and resistance and support are just a part of this huge concept. Support and resistance is one way to predict the future prices of an asset and can be used to become profitable.
Some people use this concept in an advanced way and some people use multiple ways to get more confirmations to trade but remember each and every setup and concepts will require hard work and discipline to make money out of it.