THE PSYCHOLOGY

behind SUPPORT AND RESISTANCE

PERSONAL THOUGHTS
In my personal experience, support
and resistance (SR) is the most basic
yet pragmatic technical tool available
to a technician
Its only due to its potent psychological
implications that SR has been used as
an inevitable segment of many
trading/investment strategies
The whole structure of the market
develops on the basis of SR. The
effectiveness of SR lies not only in its
simplicity but also in its fame
Although this tool has been widely
publicised in the trading community
yet there is need to understand the
intricacies involved in its functioning
LET’S DEFINE Support is an area on the chart where demand
overcomes supply. Which means that buyers were
strong enough to absorb all the supply available and
push the market up from this level. The opposite is true
for a resistance area
SR should not be
read in terms of
absolute values,
they should rather SR are easy to visualize on all form of charts. Simply
be treated as zones put all the troughs seen on a chart, from where price
or areas was able to hold and push up, are the supports.
Similarly all the peaks are resistances (John Murphy)

These consecutive higher peaks and bottoms form

the structure and trend of the market. This structure
leads us to two types of SR namely Static and
Dynamic, the former would be discussed in this
presentation
FINDING STRONG SR As I mentioned earlier SR are easy to visualize on a
chart but which SR is stronger than the others still
remains a question of concern

The strength of any support or resistance lies in the

number of touch points. The more number of times
market reverses from a support, the stronger would
be that support area. Same is true for resistance

All the touch points are joined to form a horizontal

Ex. In this Coal India 4 hourly line chart, three touch line, which is customarily called as a support or
points can be clearly seen on either side. Hence, the resistance line
zone formed by the three touch points at the bottom
forms a strong static support whereas at the top it
forms a strong static resistance
PLAYING WITH NUMBERS
Fibonacci ratios, Pivot points and Round numbers
Market participants do respect certain
numbers. They think in terms of such
numbers and then act accordingly. Its only
because of mass participation on the basis
of these numbers that the psychological
support and resistances zones are formed

Traders build their fresh positions or liquidate

old positions around these numbers. And
hence these levels become proactive SR

In this HeroMoto chart price clearly took

support at the psychological Fib and Pivot
levels before moving higher. Just notice
how these levels help in lifting support and
build a market structure
SR PSHYCHOLOGICAL ASPECTS
In order to understand the functioning of SR it is important to
understand the trading psychology involved in the process
Lets do it by taking an example of the following HDFC chart
As long as there is enough buying in the market, the
support would hold. If all the buying is absorbed and there
is still supply left in the market, the support will break and
the psychology would reverse (discussed in next slide)
After a prolonged downtrend HDFC took support at A, bounced
sharply and moved up to B. At point B many traders would have
left out feeling as they missed the buying opportunity and would
be thinking of buying if there is a pullback to A. A second group of
traders who bought at A but sold too early would also be waiting
for such pullback to buy again. A third group who are short in this
stock would have been thinking that they missed a great
opportunity to book profit at A, if the price pulls back to A they will
cover their short positions
So at B we have three type of traders whose buy orders are waiting
in the support zone ‘A’. As soon as the price pulls back to C all these
orders trigger, absorb the available supply and push the market up
A higher high is made at D. Not all the traders from the three
groups discussed above would have bought at C due to many
reasons. Many new traders would have started watching the stock
as it made a higher high and want to buy in support area A and C.
So again we have huge flux of buy orders in the same zone and as
the price pulls back to D these orders held the market up
SWITCHING PSYCHOLOGY
There is a huge flux of sell orders at or near a
resistance area (as discussed in previous slide). But as
soon as all supply is absorbed and there is still buying,
the price breaks the resistance and shoots up

As the price breaks out significantly, a large group of

traders would be looking at the stock waiting for a
pullback to the breakout level for buying. Another group
of traders who bought the breakout and sold early would
be waiting to buy again at the same level. A third group
of traders who had shorted would now realize that they
are on the wrong side and would cover as soon as price
pullback to breakeven/breakout level

So currently there are three set of traders waiting to buy at

or above an area which was previously a resistance area. If
these buyers are strong enough to hold the market, then
the resistance area switches in to support area
The opposite is true for support turning into resistance
 FINAL THOUGHTS
Psychology
• Technical tools like support and
resistance work due to traders’
psychology. Because human
psychology remains consistent,
the technical tools also work
consistently and yield promising
results
• Its only because of the concepts
discussed in this presentation
that we hear too often that
trading is 80 percent psychology
Thanks
Confluencing SR
• Now we know that more touch
points means more strong SR
zone
• When a strong SR is observed in
confluence with the numbers
discussed in this article (Fibs,
Pivots, Round numbers), it
becomes an even stronger level
and hence more tempting to take
trading decisions accordingly
• Such a level is an ideal place
around which a stop loss or
trailing stop can be placed
Trading SR
• The major advantage of
identifying SR is in taking wise
trading decision at those levels
• SR should always be read in
relation to the price action. A
bullish candlestick pattern
(engulfing, piercing, Doji, hammer
etc.) at support level reflect
buying coming in. That’s a signal
to cover short or build long
positions
• Candlestick patterns are more
useful when used in relation to SR