Do you think that the price movement of stock or any financial instrument is a random movement ? If your answer is yes then this blog is definitely for you !
Also feel free to check out the previous works in my series for better understanding of technical analysis ; absolutely for free ! Every Investor / Trader must have at least a basic understanding of Technical Analysis as it helps us to determine entry and exit points in any tradable financial instrument
How To Read a Chart
The basic chart interpretation covers three aspects: the trend, the support and the resistance. The trend can be determined by observing the sequential highs and lows. A stock (or whichever financial instrument) making higher highs and higher lows indicates a rising price trend known as an uptrend, a net price rise. Inversely, if the stock is showing lower highs and lower lows, it is indicating a price downtrend, a net price fall.
Price Support Levels
If the stock tends to continually bounce at a specific price range, then it may be a price support level. Support levels are composed of buyers who are motivated to accumulate shares. Support levels that continue to rise higher are components of up trends. This indicates the buyers are getting impatient and raising their bid prices to attract more liquidity. If the stock is not making higher highs, then a pivotal reaction will eventually form where the resistance level will either breakout and spiking the price higher, also known as an ascending triangle pattern, or the resistance will be too strong as the support breaks down.
Price Resistance Levels
If a stock continually falls at a specific price range, then it may be a resistance. Resistance levels are composed of sellers seeking to unwind long positions or add to short positions. A falling resistance level is a component of down trends, which indicates that sellers are getting impatient and continuing to lower their selling prices.
Using this setup you can wait to price of the instrument to fall to the support level and accumulate it at that price, while you can set your target at the resistance level. Stop loss should be taken at 1 to 2 ATR indicator below the price level depending upon the timeframe and risk appetite of the investor or trader. Vice Versa, while short selling the instrument we can buy at resistance , take stop loss 1 to 2 ATR above resistance and target at support. Always see your Risk - to - Reward Ratio while taking the call.
To know more about trends and trend lines ,indicators and candlestick patterns, keep your eyes open for my next blog !
By - Pranit Bhandari