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Support Resistence Moving Average Volume

The document discusses how to identify support and resistance levels in order to determine potential reversal points. It provides a 4 step process: 1. Load price data from the past 3-6 months for short term levels or 12-18 months for long term levels. 2. Identify at least 3 price zones where the price hesitated, reversed, or saw sharp movements. 3. Align the identified price zones to see if they occur at similar price levels. 4. Draw a horizontal line connecting the 3 points to identify the support or resistance level, depending on where the current price is relative to the line.

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Hemant Singh
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324 views5 pages

Support Resistence Moving Average Volume

The document discusses how to identify support and resistance levels in order to determine potential reversal points. It provides a 4 step process: 1. Load price data from the past 3-6 months for short term levels or 12-18 months for long term levels. 2. Identify at least 3 price zones where the price hesitated, reversed, or saw sharp movements. 3. Align the identified price zones to see if they occur at similar price levels. 4. Draw a horizontal line connecting the 3 points to identify the support or resistance level, depending on where the current price is relative to the line.

Uploaded by

Hemant Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The Support and Resistance

THE SUPPORT AND RESISTANCE LINES ARE ONLY INDICATIVE OF A POSSIBLE


REVERSAL OF PRICES. THEY BY NO MEANS SHOULD BE TAKEN FOR ASCERTAIN

The best way to identify the target price is to identify the support and resistance points. 

The support price is a price at which one can expect more buyers than sellers. Likewise, the
resistance price is a price at which one can expect more sellers than buyers. The resistance level is a
price point on the chart where traders expect maximum supply (in terms of selling) for the stock/index

how do we identify the resistance level? Since the process is the same, let us proceed to understand
‘support’

Here is a 4 step guide to help you understand how to identify and construct the support
and the resistance line.

Step 1) Load data points – If the objective is to identify short term S&R load at least 3-
6 months of data points. If you want to identify long term S&R, load at least 12 – 18
months of data points. When you load many data points, the chart looks compressed.
This also explains why the above two charts look squeezed.

Long term S&R – is useful for swing trading.

Short term S&R – is useful intraday and BTST trades.


Step 2) Identify at least 3 price action zones – A price action zone can be described
as ‘sticky points’ on the chart where the price has displayed at least one of the
behaviors:

Hesitated to move up further after a brief up move

Hesitated to move down further after a brief down move

Sharp reversals at a particular price point

Step 3) Align the price action zones – When you look at a 12-month chart, it is common to
spot many price action zones. But the trick is to identify at least 3 price action zones at the same
price level.

Step 4) Fit a horizontal line – Connect the three price action zones with a horizontal
line. Based on where this line fits in concerning the current market price, it either becomes
support or resistance.

Exponential Moving Averages


Rule 1) Buy (go long) when the current market price turns greater than the 50
days EMA. Once you go long, you should stay invested till the necessary sell
condition is satisfied.
Rule 2) Exit the long position (square off) when the current market price turns
lesser than the 50 days EMA.
From my own personal experience of trading based on moving averages, I have
noticed a few important characteristics:
1. Moving averages gives you many trading signals (buy and sell)
during a sideways market. Most of these signals result in marginal profits, if not
for losses
2. However usually one of those many trades results in a massive rally
(like the B3@165 trade) leading to impressive gains
3. It would be tough to segregate the big winner from the many small
trades
4. Hence the trader should not be selective in terms of selecting signals
that moving average system suggest. In fact, the trader should trade all the
trades that the system suggests
5. Remember the losses are minimized in a moving average system,
but that 1 big trade is good enough to compensate for all the losses and can
give you sufficient profits
6. The profit-making trade ensures you are in the trend as long as the
trend lasts. Sometimes even upto several months. For this reason, MA can be
used as a proxy for identifying long term investment ideas
7. The key to MA trading system is to take all the trades and not be
judgmental about the signals being generated by the system.
8. Moving average crossover system
The entry and exit rules for the crossover system is as stated below:
Rule 1) – Buy (fresh long) when the short term moving averages turns greater
than the long term moving average. Stay in the trade as long as this condition is
satisfied
Rule 2) – Exit the long position (square off) when the short term moving
average turns lesser than the longer-term moving average
A trader can use any combination to create a MA cross over system. Some of
the popular combinations for a swing trader would be:
1. 9 day EMA with 21 days EMA – use this for short term trades ( upto
few trading session)
2. 25 day EMA with 50 days EMA – use this to identify medium-term
trade (upto few weeks)
3. 50 day EMA with 100 Day EMA – use this to identify trades that lasts
upto few months
4. 100 day EMA with 200 days EMA – use this to identify long term
trades (investment opportunities), some of them can even last for over a year or
more.
Needless to say, the MA crossover system can also be applied for intraday
trading. For instance, one could use the 15 x 30 minutes crossover to identify
intraday opportunities. A more aggressive trader could use a 5 x 10-minute
crossover.

VOLUMES

Increase or decrease in volume are comparative over average volumes of past


10 days

The thought process behind the volume trend table


When institutional investors buy or sell, they obviously do not transact in small
chunks. For example, think about India’s LIC; they are one of India’s biggest
domestic institutional investors. If they would buy shares of Cummins India,
would you think they would buy 500 shares? Obviously not, they would probably
buy 500,000 shares or even more. If they were to buy 500,000 shares from the
open market, it would start reflecting in volumes. Besides, because they are
buying a large chunk of shares, the share price also tends to go up. Usually,
institutional money is referred to as “smart money”. It is perceived that ‘smart
money’ always makes wiser moves in the market than retail traders. Hence
following the smart money seems like a wise idea.

If both the price and the volume are increasing this only means one thing – a big
player is showing interest in the stock. Going by the assumption that smart
money always makes smart choices, the expectation turns bullish, and hence one
should look at buying opportunity in the stock.

Or as a corollary, whenever you decide to buy, ensure that the volumes are
substantial. This means that you are buying along with the smart money.

This is exactly what the 1st row in the volume trend table indicates – expectation
turns bullish when both the price and volume increases.
What do you think happens when the price increases but the volume decreases
as indicated in the 2nd row?
Think about it on the following terms:
Why is the price increasing?
Because market participants are buying
Are there any institutional buyers associated with the price increase?
Not likely
How would you know that there is no meaningful purchase by institutional
investors?
Simple, if they were buying, then the volumes would have increased and not
decrease.
So what does a price increase, associated by decreasing volumes indicate?
It means the price is increasing because of small retail participation and not really
influential buying. Hence it would help if you were cautious as this could be a
possible bull trap.
Going forward, the 3rd row says, a decrease in price along with an increase in
volume sets a bearish expectation. Why do you think so?
A price decrease indicates that market participants are selling the stock. Increase
in volumes indicates the presence of smart money. Both events occurring
together (decrease in price + increase in volumes) imply that smart money is
selling stocks. Going by the assumption that smart money always makes smart
choices, the expectation is bearish, and hence one should look at selling
opportunity in the stock.
Or as a corollary, whenever you decide to sell, ensure that the volumes are good.
This means that you too, are selling, along with the smart money.
Moving forward, what do you think happens when both volume and price
decrease as indicated in the 4th row?
Think about it in on following terms:
Why is the price decreasing?
Because market participants are selling.
Are there any institutional sellers associated with the price decrease?
Not likely
How would you know that there are no meaningful sell orders by institutional
investors?
Simple, if they were selling, then the volume would increase and not decrease.
So how would you infer a decline in price and a decline in volume?
It means the price decreases because of small retail participation, and not really
influential (read as smart money) selling. Hence it would help if you were cautious
as this could be a possible bear trap.

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