BQLearning: How Support And Resistance Levels Help To Identify Trading Opportunities

BQ Learning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.

In this series, we explain the support and resistance levels and the significance of accumulation and liquidation.

Support And Resistance Levels

A support level forms the base of a security from where prices usually tend to bounce back. It denotes the historical level where there are more buyers than sellers, providing support to a security and help it move higher from there.

Contrary to that, a resistance level is that point at which the rise in the stock price is halted and more number of sellers book profits. Support and resistance levels make good entry/exit points for short-term traders.

A breach of the support level indicates further downside for the stock, while a breach of the resistance level means the positive trend is likely to continue.

Accumulation

Accumulation is the process by which an excess supply of stock is absorbed by rising demand. More number of buyers start accumulating the underlying stock at various price points in an uptrend or at a time the stock is consolidating within a price range. Accumulation over a period has a favourable effect on the price as it indicates steady demand for a stock. Heavy accumulation is usually a precursor to an upward price move.

Liquidation

Liquidation refers to exiting a securities position or “booking out” as it is more commonly known. Another approach is to take an equal but opposite position in the same security. Partial liquidation occurs when a defined proportion of the total number of shares held is exited at differing price points.

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