This is Part 2 of the How to become a better than average Investor series , see Part 1
In the last post we discussed the importance of Fundamental and Technical Analysis . Now we will see one of the most simple , easy and powerful thing called Support and Resistance .
This is for people who have no idea about what is it and have at most heard about it .
Let us see both of them one by one .
Support :Support for a price is a price area where there are lots of buyers ready to buy the stocks rather than sellers . At that price point , the general perception is that its a good buy , and lots of buyers come to buy it . Hence buyers outnumber sellers and there is a higher possibility that prices will bounce back from that point . This is a point where Buying has less risk .
In other words , at support levels demand is thought to be strong enough to prevent the price from declining further . Please understand that Support point is not a place from where it will for sure bounce back , Its only the higher probability that it will bounce back . Also understand that its not exactly a fixed price which should be considered as Support , generally its a range like 98-100 or 560-570 .. Which point is Support point : Every Low made by the price can be considered as Support Area .
Let see Example :
Support Example 1 : Below chart is for Jaiprakash Associates (click to enlarge) , It made a low of Rs 53 (closing price) on 27th Oct 2008 and then bounced up from there . Now Rs 53 is the support point , Prices went up from that point and after reaching Rs 90 , it again started heading down , You can clearly see in charts that it reached Rs 53 levels , but could not break down from that point and again bounced back from there .
It was a very good "BUY" around Rs 53 .Understand that buying around Rs 53 , is only a less-risky trade , not a "no-risk" trade . Prices can break down from there also .
Support Example 2 :Below is a chart of RPL . Here you can see that prices made lows of Rs 70 around Dec 1 , 08 . That became a support point , and then prices reached thought levels around first week of Mar 09 , It bounces back from that point , It was a less risk trade around Rs 70 .
Resistance :Resistance is just opposite of Support , At this price levels there are more sellers than buyers and with high probability prices reverses from this point . At this point there are enough sellers in the market to prevent it from rising further .
Resistance point is the High made by a price . All the high's will act as some kind of resistance points .
Lets see examples :
Resistance Example 1 : Below is Reliance Charts , You can see that reliance made a high of Rs 1400 around Dec 2008 , After that you can see how it reversed from that point 2 times in Jan and Feb 2009 . It was a wise decision to sell at those points .
You can also find many examples like this if you investigate yourself . Try to see other charts if you are interested , you can look at charts at ichart.in or http://www.bazaartrend.com/index.php , find yourself) Important Note :When prices are near Support or Resistance levels , you should be more alert . It does not mean that you just jump onto market and buy or sell , Be patient to see the actual price reversal , Though you will loose some part , that would be a better trade . Also there are several other factors which should be considered , but for now lets not touch upon them . lets keep it simple for readers .
Lets also look at some important points
Break Down :Always remember that when prices dont hold support and break them and fall further , it tells that buyers are not strong enough and Sellers have taken over them and prices will make new lows , When support is broken , Sell further .
Example :Below is the chart of RPL , which shows how it broke down its support point and then made further lows .
Break Out : When prices dont hold resistance points and break them on upside , prices then indicate that they are going to make new highs . Better to buy at that point .
1. Support and Resistance points are places where you should be more alert and look for other signals to buy or Sell, just dont buy because prices have reached near support , buy it when it starts rising and there are positive signals .
3. Many times there are false breakout and breakdown , So it will many times happen that you get out at important levels and miss the large movement , thats fine , you can always enter after getting out .
4. This is most important point , Everything I talked about in this article can increase your chances of making more money in trading , but remember that you are dealing in Markets , and if you dont control your GREED and emotions , your failure is guaranteed . Use strict Stop losses and use Money management techniques (it means not putting all your money at once , if you have 10 lacs , put only 1 lac , dont be greedy enough , else someday you markets will punish you badly , then no Technical analysis or any thing will help . have good amount of cash with you always ).
All technical Analysis and knowledge are of no help if a person cant control his greed and emotions in Market . TA and your knowledge will contribute not more than 20% of your success in long run .
This was end of Part 2 of this series , In next port (Part 3) we will see how to find support and resistance levels using TRENDLINES . wait for it .
Comments please , Its sometimes disheartning to see no comments after I put up a post after some hard work . I dont want "good post or Great Article kind of comments , but at least share what you have learned and ask questions , make it little interactive please .
Question for you all :
Question 1 : Do you think this support or resistance thing works , or can you add anything else how to buy or sell and what things to observe at support and resistance levels , which can make buying and selling more successful ?
Question 2 : What do you think about ChambalFertilizrs at this point , see the charts at :http://www.bazaartrend.com/index.php?symbolname=CHAMBLFERT (click on the upper left button to make it full screen) . Suggest what should be done at this point of time ? I came across very nice video , about difference between winning and success , a worth watch . See it below
Note : All the things discussed here are available on net with great detail . learn more of it yourself .