Abhay was glued to the computer for hours. Abhay had just opened a trading and demat account a few weeks ago. He wanted to be able to understand the market before he ventured into it. He could only learn so much. After a point, it got quite confusing.
He thought, "What I need is someone who understands things in a simple way." Sunil, his neighbor downstairs, was the only person Abhay could trust to help him understand stock markets and investment concepts. He went on to seek Sunil’s assistance.
"Hey Abhay," Sunil greeted him. "I was just going up by myself. Tell me, what's the matter?
Abhay admitted that he had just decided to trade shares. "But I have trouble understanding certain concepts. Please help me.
Sunil replied with a ready smile. Sunil replied with a smile. Let me know where we can start.
"So, I looked at this concept called Support. What is support in relation to the stock market? Perhaps we could start with that," Abhay suggested.
Sure. Sunil encouraged that it's a good starting point. It's a simple concept. Let me explain. Let me explain. Sunil said that support levels are also available for assets such as options and futures, as well commodities or indices.
Abhay agreed. Abhay then said, "Okay." How can we be sure that the price will not fall below a certain level?
It's simple because support levels can only be calculated for specific time periods. A support level for assets is only valid for a limited time. It is subject to change very frequently," Sunil explained.
Abhay explained it to him by saying, "Let's explain this further using an illustration." Let's take, for example, the shares of Yes Bank. They trade at Rs. 28 per share Yes Bank has experienced many ups, and downs in the last 30 days. Despite these wild swings however, the share price has not fallen below Rs. 24. We can therefore conclude that Yes Bank's support level for a 30-day period of Rs. 24
"Ah! Abhay felt relieved and sighed. There was more. "I have another doubt though. "How are support levels created?"
Sunil agreed, "That's an excellent question." A support level is generally created when there is an influx of buyers buying assets. This could happen, for example, if the asset's price falls.
"Okay, that's enough. Another thing is also interesting to me. Abhay admitted, "Tell me Sunil, what happens if the asset's price touches a support level?"
When the asset's price reaches a support level, one of two outcomes is likely. Sunil explained that the asset's price could bounce back up or fall further.
Then he added, "When the asset's price bounces back up it is called a reversal." If the price drops further, it is considered a 'broken' support level. After a support has been broken, a new level of support is established taking into consideration the asset's new lows.
Abhay was fascinated. "That's quite interesting, Sunil. "Now, let's look at the practical side of this whole thing. What is the importance of asset support?
"I am glad that you have ventured into this territory, especially as you are going to start trading soon. Support levels are the heart of technical analysis in share trades. To determine entry and exit points for your trades in intraday forex, support levels can be used. Support is important for intraday trading of shares but also for trading derivatives such as options and futures.
Abhay said, "Alright then. I guess that clarified all of my doubts." Sunil, you've made it so simple and clear. This concept was confusing to me just a few moments ago. It's now clear to me. He said that he was excited to learn more about intraday trading as well as about purchasing futures and options.
He smiled before he left and said, "I might just have to drop in for more such quick sessions, Sunil." These things are better explained than anyone, and that's why you do it so well.