Understanding on the Term Resistance in Share Market

Understanding the price action can be challenging even for an ace investor or trader. To position the trades properly, one must have a decent idea regarding the price level at which it trades. The resistance in the stock market is such an indicator that gives a broad idea regarding the price range of an asset. In simple terms, the resistance level refers to the price point that stops the movement of prices in any direction. However, there is another term used frequently in combination with resistance. It is the support level. It indicates the price support level when there is a possibility of a downtrend getting paused. It generally happens when many people want to rather than sell.  

A large number of traders use support and resistance levels simultaneously while trading. However, let us here restrict our discussion to what is resistance in the stock market. An asset’s resistance or resistance level marks the temporary pause, which is in an uptrend. As the prices go up, there may be a rise in the number of sellers. These sellers will want to sell the asset at that particular price. It creates pressure on the prices, which have been rising until now. So, the uptrend of the asset’s price will witness immense resistance because of the selling.

The phenomenon of a resistance level occurs for a short period. Usually, it is temporary in most cases. However, there may be new and updated information arriving about the asset. It can alter the view of the market participants very quickly. Hence, the whole attitude or sentiment of investors and traders will change. They will now re-assess the potential of the asset. Based on this assessment, they will decide the future strategy for trading in the asset. Though, the resistance level can sometimes last longer. Although there is no change in the information about the stock, the resistance will further hold the increasing prices.

In technical analysis, one can chart the simple resistance level as a line. Likewise, the asset’s price action chart will draw a line joining the highest highs for the concerned time range. 

The shape of this line will depend on the changes in the stock price. It can be either flat or a slant line. Experienced traders with sound knowledge of various indicators also use some advanced techniques to find the resistance levels. First, they use well-known indicators such as moving averages, trendlines, and bands.

What Does Resistance Suggest to Us?

Technical analysis involves a vast process of assessing the assets. It takes into account numerous crucial factors. First, a great deal of information is necessary about the assets, be it a stock, commodity, or currency. The principal notion of the technical analysis theory is that it may not be correct to base our investment judgments on this information alone. That is why traders wish to look at short-term movements in the prices of assets. They compare the price action with the same kinds of markets. They also draw comparisons between the current scenario and the past ones. As they want to be very precise about the entry and exit points of a trade, they try to spot the resistance and support levels of the assets. They aim to profit from the breakouts or reversals in trends.

The fascinating part about the resistance levels is that one can also use them as risk management tools. The traders use the stop-loss limits for following the resistance level. In addition, any breaking of the resistance levels can be a trade signal for them. The simple resistance level needs new price data sets for its formation in the chart. However, many platforms provide various other visualizations for tracing resistance levels. It is possible to calculate them in dynamic or changing conditions. Also, many other technical indicators can assist us in finding the resistance levels of an asset at various intervals in price changes. The simple moving averages, for example, excellently help in spotting the resistance level when price actions are below the line during downtrends.

An Example of Resistance Level

Let us now take an example to understand better how we can use resistance levels. Let there be a company named ABC that you are studying. Here, you aim to determine the time to execute a short sell for these shares. In the last two quarters of the financial year, the company’s shares are trading at Rs. 85 and Rs. 108. During the third month of the 1st quarter, the prices of these shares rose to Rs. 103. By the 1st month of the second quarter, the prices fell to Rs. 95. By this month’s end, the prices rise again in the middle of the second month of the second quarter. At the end of this month, the price of the shares is at Rs. 101, climbing a bit again. Following this, the share prices see a small decline again, reaching Rs. 99. Finally, it again goes to the Rs. 103 level. 

So, you can understand that Rs. 103 is the resistance level. If you find that there can be no such condition that could lead to a breakout of the stock from this band, you can sell it. The band has existed for the last two quarters or six months. If you are holding the asset for all this while, you can use this opportunity to short sell the stock. The market gives clear and sustained signals when intense selling occurs as the stock attains Rs.103 level. It stops the price of the stock from rising above Rs.103. Yet, some care is necessary as there can be instances where the prices go past the resistance levels. It happens in case of good economic growth or enhanced results of the company’s business, which can dilute the technical powers.

Difference Between Resistance Level and Support Level

Most traders use resistance and the support level together while trading. The resistance gives us the highest price that the asset can reach. 

It’s the maximum limit for any kind of asset. So going above this price range, the asset breaks out from the resistance level upward. 

The support level is in the lower price range. So if an asset’s price breaks the support level, it will be downward.

Working of the Resistance Line

On the price action chart of an asset, the lines indicate the trend by showing how
rnthe asset moves over some time. It depicts all the upward movements as well as the downward movements. These lines help us analyze price action and mark the trends to know how the prices can move shortly. As the lines move forward, the system calculates based on the prices in the time intervals. The resistance line thus assists the investors for traders in finding the pattern for identifying the resistance and support areas.

Conclusion

The resistance level is the maximum price level that an asset can rise to. It acts as a ceiling for the price range between which the asset may trend. It is one of the key concepts used by many traders, investors, and analysts. 

It is a key part of several technical analysis tools that they use. For example, many traders use the support level in alliance with the resistance levels for analyzing the price action. 

It helps them get more accurate buy and sell signals. They also use a variety of other technical indicators moving averages and trend lines to better gauge the price actions. Many traders use the trend lines to find the support and resistance areas. However, one should keep in mind that resistance is a market concept rather than an accurate technical indicator. One can use it smartly, though, to execute profitable trades.

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