What Is Resistance In Stock Market

Understand What Is Resistance In Stock Market

With more people buying and selling stocks, online share trading has become increasingly popular. Additionally, several concepts play an important role in online share trading, including resistance.

Resistance in the stock market refers to a price level above which a stock is unlikely to rise. For example, if a stock is constantly touching a level of Rs.200 and dropping, you can call it resistance. Further, technical levels can also be used to determine stock market resistance.

Overall, when it comes to investing and trading, understanding resistance is crucial, because it helps you make better decisions. Here, you will understand what resistance is in the stock market, how to determine its time frame, and how you can use it to make money.

What Is Resistance In the Stock Market?

The term resistance in the stock market refers to a price above which a stock is unlikely to rise. Moreover, it's the presumed "ceiling" price of a particular stock. In simple words, resistance in the stock market means something like a barrier. 

Additionally, resistance can be an intuitive or technical barrier or even a psychological one. It has been proven that 50,000 in the Sensex and 15,000 in the Nifty are stock market resistance levels. However, it is purely psychological resistance. Thus, we can say resistance in the stock market is a combination of technical, intuitive, and psychological factors.

Furthermore, a stock's resistance level is a straight line connecting two or more of its high points. When a stock is trending up, its resistance line might be inclining. Whereas the resistance line might be declining if a stock is trading down.

Resistance in the stock market is when investors or traders are willing to sell, preventing the price from rising further. They are price points on charts where traders expect maximum selling. This means resistances are created by expectations and eventually become real ones. Generally, the resistance level is above the current market price.

You can also look at resistance in terms of probability. Like, a resistance level is when there is less chance of the price moving above the level than if the price meets a price barrier and falls. Moreover, anyone who trades or participates in online share trading looks at resistance as a critical technical analysis tool.

How to Make Use Of Resistance in the Stock Market?

Here's how to use resistance in stock market:

Resistance levels indicate excess supply. Over time, this expectation becomes actual resistance. At these levels, supplies start building up, and buying drops as buyers get cautious. Eventually, this excess selling pressure drags prices down.

You can use the resistance line to reduce the chance of a market correction by booking profits before the resistance line. In the short term, the resistance line is normally below the level where you can sell and the stop loss is normally above it. Moreover, you have to test a resistance line over time and multiple times.

Additionally, breaking the resistance line with high volumes is a breakout signal, and encourages traders to buy as it signals that the stock price will rise since the resistance was breached with high volume.

How to Decide the Timeframe for Resistance Lines?

Timeframes for resistance in the stock market depend on your goals. Like whether you want long-term or short-term. Let's understand with an example, assume there are two investors interested in understanding the price patterns of the investment.

In the first case, the investor is considering the long term. Rather than selling the investment right away, he intends to hold on to it for several years. Thus, when this investor draws a resistance line, he will consider the investment's price performance over those years. Basically, this line represents a price level the investor believes will remain a "ceiling" or maximum for a long period of time. Eventually, he may decide to sell his investment if the price reaches this line or closes to it.

However, the second investor is more interested in the short term. He plans to sell the investment relatively soon. This investor will draw the resistance line based on the investment's price performance over the short period. This line shows a short-term "ceiling" or maximum price level. When the price reaches or approaches this line, he might sell the investment.

Thus, both investors will draw separate resistance lines on their graphs since they have different goals and timeframes. For long-term investors, the resistance line reflects the price ceiling over a longer period of time. Whereas, for shorter-term investors, the resistance line reflects the price ceiling over a shorter period.

Does the Stock Price Stop Ahead Of the Resistance?

In reality, the resistance line is often breached by small margins. It happens because when a stock gains momentum, it overshoots such technical levels. However, the price usually drops back below the resistance as the supply builds up.

On charts, resistance is usually shown as a horizontal line and is usually higher than the current market price. However, if you look at the price chart, you will see it temporarily breaking above the resistance several times, before settling below it.

In long-term trading, buyers try to book profits before the resistance level is reached. Similarly, when the resistance level approaches, sellers tend to sell the stock for trading and cover it when the price falls. 

However, the question is how a price becomes a resistance price. How do you determine whether Tata Steel is at resistance at Rs.1250 or Rs.1275? Well, through the continuous conflict between buyers and sellers and based on combined expectations, such levels are built over time. The situation eventually gets to a point where sellers are willing to sell, and buyers are unwilling to buy.

Conclusion

A resistance level represents the price level over which stock is unlikely to rise, acting as a "ceiling" for price movement. It's influenced by technical indicators, intuitive market behavior, and psychology.

Additionally, timeframes for resistance lines depend on individual goals. The long-term investor looks at the investment's price performance over a long period, while the short-term investor looks at a shorter period. According to these timeframes, different resistance lines are drawn. You can customize your analysis and draw these lines based on your preferred timeframes using a stock market app.

In online share trading, you can make informed decisions and potentially improve your strategies by understanding and utilizing resistance levels. Also, technical analysis helps you figure out market dynamics and price ceilings.