We had learned about the entry points and stoploss points while discussing candlestick patterns. The target price was not mentioned. The same topic will be discussed in this chapter.
The best way to determine the target price is by identifying the support and resistance points. The S&R is the price point on the chart that influences the maximum amount of selling or buying. The support price is the price at which you can expect more sellers than buyers. The resistance price is the same. It is a price where one can expect to find more sellers than buyers.
S&R can also be used by traders to identify trade entry points on a stand-alone basis.
Resistance is a level that stops the price rising further, as the name implies.The resistence level can be define as the price point in the chart where the maximum supply for the stock is expected by the traders in terms of selling.
It is possible for the price to rise to the resistance level and consolidate, absorb all of the supply, then decline. Market participants will look at the resistance as one of their key technical analysis tools in a rising market. Here is Ambuja Cements Limited's chart. Ambuja Cements' resistance level is marked by the horizontal line that coincides at Rs.215 in the chart.
The chart has been deliberately reduced to include more data points. I'll explain why in a moment. Before you look at the chart, there are two important things to remember:
Let's imagine Ambuja cement at Rs.206 creating a bullish marubuzo, with a low around 202. This is a signal to start a long-term trade. We also know that the stoploss is at 202. We now have the knowledge to set 215 as our target for this trade, thanks to our newfound knowledge about resistance!
You may be wondering why 215? These are the reasons:
For the reasons mentioned above, traders who are long can use resistance points to determine targets and exit points.
The long trade can be designed completely once the resistance has been identified.
Entry - 206; Stoploss--202; Target - 215.
Next, the obvious question is: How do we identify the resistance level. It is very easy to identify price points that are either support or resistance. Both support and resistance can be identified the same way. It is a resistance point if the current market price falls below it. If it is higher than it, it is a support point.
The process is identical so let's begin to understand "support" and then we'll move on to the identification of S&R.
Understanding resistance should be easy and intuitive once you have learned about it. Support is a level that stops the price falling further, as the name implies. The support level on the chart is the price point at which the trader anticipates the greatest demand (in terms buying) for the stock/index. It is possible for the price to rebound if it falls below the support line.Support level should lie below the current price prevailing in the market
The price will fall to the support level, consolidate, absorb all demand and then move upwards. In a declining market, the support is a crucial technical level that market participants need to look for. Support can often act as a trigger to purchase.
Here's the chart for Cipla Limited. The support level for Cipla is indicated by the horizontal line that coincides at 435 on this chart.
The chart below has a few things you should be aware of:
As we did when understanding resistance, let's imagine a bearish formation. Perhaps a shooting star at 442, with a high of 436, or a bearish pattern formation. With a shooting star, the call at 442 is too short, and the stoploss at 446 is too high. We know that 435 is the immediate support so we can set our target at 435.
What makes Rs.435 a worthy target? reasons for the same mentioned below:
Because of the above reasons, traders who are short can use support points to help them set targets and exit points.
The short trade can now be fully designed once the support has been identified.
This guide will help you identify and build the support and resistance lines.
Step 1) Load data pointsIf you are trying to find short term S&R, load at least 3 months of data points. Load at least 12 to 18 months worth of data points if you are looking for long-term S&R. The chart will look compressed if you load too many data points. This is also why the two above charts look compressed.
Here's a chart in which I loaded 12 months worth of data points
Step 2: Identify at most 3 price action areas -The price action zone is a region on the chart that has shown at least one of these behaviours.
These charts identify the 3 points above in the same order.
The chart below shows the price that is hesitant to increase after a short up movement.
The chart below shows the price that is hesitant to fall further after a short down move.
The chart below shows sharp price reversals.
Step 3: Align the price action areasIt is not uncommon to see price action zones in a 12-month chart. It is important to find at least three price action zones at the exact same price level.
Here is an example of a chart showing two price action zones, but not at the same price point.
The following chart shows 3 price action zones, which are all around the same price points.
It is important to keep these price action zones well-spaced in time. If the first price action zone is identified in May's 2nd week, it will be possible to find the second price zone in May at any time after May 4th (well spaced in the time). The S&R identification is more effective the further apart two price action zones are.
Step 4 Place a horizontal lineConnect the three price action areas with a horizontal line.Depending on the market price at that moment, this line can be considered support or resistance.
Take a look at the following chart
Start from the left
The above chart shows that all 4 price action zones are at the same price points. At 429. The horizontal line clearly shows that the current market price of 442.5 is below it, so Cipla's support price at 429 is immediately.
You must be aware that any visual exercise in Technical Analysis, such as identifying S&R or identifying S&R will expose you to the approximation risk. Hence always give room for error. The price level is often shown in a range, and not at one price point.It is an area or zone which stands as support or resistance.
I believe that Cipla would benefit from a price range of 426 to 432. This range is not defined. I simply subtracted 3 points from 429 to arrive at my price range.
This chart shows the S&R for Ambuja Cements Limited.
Ambuja's current price is 204.1. The support level is at 201 (below the current market price) and the resistance is at 214 (above the current market price). If one is short Ambuja at 204.1, the support level can be found at 201. This would probably be a good intraday trading opportunity. A trader who is long at 204 can set a reasonable target expectation, which is based on resistance.
Both the support and resistance levels show at least three price action zones. They are all well-spaced in time.
Support and resistance lines indicate a possible price reversal. These lines should not be considered definitive. As with all technical analysis, it is important to consider the probability of an event (based on patterns) and how likely it is.
Based on, for example, the chart of Ambuja Cements
Current Market Price = 234
Resistance = 214
This is because Ambuja cement is expected to rise if it encounters resistance at 214. This means that at 214 sellers could emerge to lower the prices. Is there any guarantee that sellers will come in at 214? What can be the dependence of this resistance line? Your answer can be nice as mine.
It is clear that Ambuja reacted in an unusual way when it reached 214. This led to the formation a price action area. This is because the price action zones are well-spaced in time. This means 214It is a tried and true price action zone. Keep the first rule of technical analysis in mind, i.e."History tends not to repeat itself."We believe that support and resistance levels can be reasonably honored.
Based on my trading experience, I have found that well-constructed S&R points are often well-respected.
We are at perhaps the most crucial juncture of this module. We will be able to identify high-quality trades by using optimization techniques. Quality is not always the best option. However, this compromise is one that is worthwhile. It is important to distinguish quality signals from many but useless trades.
Optimization is the process of fine-tuning a process to achieve the best results. This is the process of identifying trades.
Let's go back to candlestick patterns. Maybe we are referring to the first one, the bullish marubuzo. Bullish marubuzo is a trade that takes place near the end of the marubuzo. The stoploss is set at the low of marubuzo.
Consider the following credentials to be a bullish marubuzo.
Open = 432; High = 449; Low = 430; Close = 448
The entry point for the long trade is at approximately 448 with 430 as the stoploss.
What if the low of a marubuzo coincides with a well-tested support? Is there a surprising convergence of two technical theories?
To go long, we have two confirmations. Consider the following terms:
A trade setup that is well-crafted and executed will be the best tool for a trader dealing in a random environment like the markets. These conditions (marubuzo and support near the low), suggest the same action. In this instance, you should initiate a long trade.
This brings us to an important point. What if there was a checklist for each trade? Before initiating any trade, the checklist would serve as a guideline. The checklist should be followed. If it meets the conditions, we accept the trade. Otherwise, we cancel the trade and search for another trade opportunity that conforms to the checklist.
They say discipline is the key to 80% of trader success. The checklist is a good tool to help you stay disciplined and avoid making rash trading decisions.
To begin with, let's review the two most important factors on the checklist.
This checklist will be built as we learn new TA concepts in the module. To quench your curiosity, the final checklist contains 6 checklist points. Each one of the 6 points will be weighed down once we have all the information. Although checklist point 4 might not be as crucial as point 1, it is still more important than the 100 other factors that can distract traders.