‘Buy on dips and sell on rallies’ is something most of the investors might have come across as it is often suggested as a viable trading strategy by many pundits. Buying on dips means purchasing an asset after there is a decline in its price, expecting an upward trend eventually. Selling on rallies is the opposite of buying on dips.
Often, the stock market sees artificial rallies and dips that entice newbie investors into investing, and they end up losing their hard-earned money. To ascertain genuine dips and rallies in the stock market, investors use two types of analysis –
- Fundamental analysis
- Technical analysis
Those who prefer the latter, i.e., technical analysis, require analysing charts to ascertain patterns and determine the most appropriate entry and exit points. For such traders, support and resistance in the share market are vital aspects of trading.
A brief idea about the support and resistance levels
The support and resistance levels in a candlestick stock chart see the highest amount of buying or selling. The support price is where you will find more buyers, and the resistance level is home to more sellers.
The resistance point is above the current market price
The resistance point is the price level that prevents the stock value from rising further. It is always above the current market price and garners the maximum attention of sellers. Whenever any share reaches its resistance, there are plenty of investors who exit their long positions, preventing the price from going higher. It ends up dipping in most cases.
The support level is below the current market price
Now that you know what is a resistance level, the next vital point is to understand the support level. The support level is a price point on the graph that prevents the stock’s price from falling further. If you ask a trader which stocks to buy today, they will suggest that you purchase those trading near their support points. Unlike the resistance point, the support point is always
below the current market price of the share.
How do traders use support and resistance in the stock market for executing trades?
Traders use support and resistance points to determine their entry and exit points pertaining to trade. These traders look to exit the trade when the resistance level is met, i.e., they believe that the price uptrend will pause temporarily or even reverse because of high supply.
This tracking and analysing of candlestick stock charts, determining the resistance and supports levels could get a bit difficult for an investor who doesn’t have a detailed understanding of how the stock market works. Instead of taking hasty investment decisions or being influenced by trends that are wrongly calculated or predicted, it is always prudent to reach out to a financial advisor who can curate bespoke investment plans based on your financial goals, risk appetite and age.