Stocks Analysis: Understanding Pivot Points, Resistance and Support

Support and resistance is one of the most widely used concepts in trading. Let us understand them.

Support

Support occurs when falling prices stop, change direction, and begin to rise. Support is often viewed as a “floor” which is supporting, or holding up, prices.

Resistance

Resistance is a price level where rising prices stop, change direction, and begin to fall. Resistance is often viewed as a “ceiling” keeping prices from rising higher.
Screenshot 2021-10-22 at 1.41.12 PM

If price breaks support or resistance, the price often continues to the next level of support or resistance.
Screenshot 2021-10-22 at 1.45.40 PM

Hence, support/resistance levels help identify possible points where price may change directions.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (a bull market).

  1. When the price moves up and then pulls back, the highest point reached before it pulled back is now resistance. Resistance levels indicate where there will be a surplus of sellers.

  2. When the price continues up again, the lowest point reached before it started back is now support. Support levels indicate where there will be a surplus of buyers .

In this way, resistance and support are continually formed as the price moves up and down over time. The reverse is true during a downtrend

In the most basic way, this is how support and resistance are normally traded:

Trade the “Bounce”

  • Buy when the price falls towards support as it is likely to bounce back upwards because of surplus of buyers on reaching support.
  • Sell when the price rises towards resistance as it is likely to dip again because of surplus of sellers on reaching resistance.

Trade the “Break”

  • Buy when the price breaks up through resistance as the price is likely to continue to rise till next resistance level.
  • Sell when the price breaks down through support as the price is likely to continue to fall till next support level.

How Pivot Points are calculated with actual market data?

PP: Pivot Point (Coincidence point of primary support and resistance)
S1: First support level below PP
S2: Second support level below S1
S3: Third support level below S2
R1: First resistance level above PP
R2: Second resistance level above R1
R3: Third resistance level above R2

Pivot points are calculated based on the high, low, and closing prices of previous trading sessions, and they’re used to predict support and resistance levels in the current session.

These support and resistance levels can be used by traders to determine entry and exit points, both for stop-losses and profit taking.

Pro Tip

The pivot point itself is the primary support and resistance when calculating it. This means that the largest price movement is expected to occur at this price. The other support and resistance levels are less influential, but they may still generate significant price movements.

Pivot points can be used in two ways. The first way is to determine the overall market trend. If the pivot point price is broken in an upward movement, then the market is bullish. If the price drops through the pivot point, then it’s is bearish.

The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop loss order at or near a support level.

You can check out all these data for any stock on Signals feature within the Stocks & ETFs section on Niyo Money and take more informed decisions while buying/selling a stock.

If you have not already started stocks trading with us, hurry up and open a demat account with us on Niyo Money app and also get Rs 200 as welcome bonus on completing account activation.

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