In this article, we will discuss:
- What is Swing Trading?
- What is the Support Level?
- What is the Resistance Level?
- How To Identify Support and Resistance Zones
- Conclusion
- Frequently Asked Questions
When it comes to intraday trading, traders leverage the use of different trading strategies to approach financial markets. Swing trading strategies are among those very popular trading styles. Traders often leverage it to make profits in a rapidly changing market scenario. Other strategies may include momentum trading, scalping, day trading, position trading, etc.
Even under swing trading, there are different approaches a trader can take. For example, some use Fibonacci retracements to identify patterns; some use support and resistance levels to make their decision. On the other hand, some traders also use Bollinger bands to meet their purpose.
In this blog, we will keep our focus limited to understanding what support and resistance levels mean in swing trading strategy and how you can leverage them. Before that, let us first take a quick look at what swing trading means.
What is Swing Trading?
Swing trading got its name from the core fact that traders leverage price oscillation or swinging of the price to make profits with this strategy. Fluctuations in the market make a stock’s price swing upward or downward; hence the name swing trading. Swing traders hold their position from anywhere between 3 days to 3 weeks to make a profit out of the swings in price of a stock.
A swing trader aims to identify profit opportunities in the price swings of a stock by analysing different market trends before taking a position. They combine the use of different trading analysis metrics and indicators to identify an opening.
A factor that makes swing trading so unique is that it leverages the use of different components of day trading to make a successful trade. They look for bearish and bullish trends and try to gauge if there is any possibility of a countertrend. They aim to enter a trade where the countertrend will soon reverse, making the prices swing.
What is the Support Level?
The price of a stock is determined by its demand and supply levels. You might be aware of the basic concept of demand and supply where the price of a commodity falls when the number of sellers is higher than the number of buyers and vice versa. The same applies to stocks as well.
Owing to any reason, when the supply of a stock is higher than its demand, its price falls. Similarly, when its demand is higher than the supply, the price increases. However, as the phenomenon goes on, a trend is never permanent in the market. This means that every trend is bound to face corrections.
When the price of a stock continues to fall, it reaches a point where it stops falling and then starts rising back up again. This is called a trend reversal, countertrend or correction. The price level at which the price of a stock stops falling and starts to rise again is called its level of support. It is referred to as a point where more buyers enter the market willing to buy the stock, which leads to this trend reversal.
For example, the price of stock X had been falling for 2 days and was trading at ₹316 on Tuesday this week. However, after studying the charts, you realise that somewhere around 316, the price started moving upwards and is now on a rising trend. That means a support level formed around ₹316, which caused the price to shoot back up.
What is the Resistance Level?
Resistance is just the opposite of support in swing trading. The increase in price is owed to the fact that the demand for a stock is higher than the level of supply, or in other words, the number of buyers is higher than the number of sellers in the market.
This leads to a rise in price until it reaches a point where buyers decide that it is not worth buying the stock at this price point. It becomes overpriced, and this realisation leads to a fall in demand, thereby resulting in a fall in stock price.
Hence, the level at which the price of a stock stops rising and prepares for a downtrend is the resistance level of a stock. It is the point where the market starts resisting the price increase and eventually pushes it back to fall until the level of demand comes to par with the level of supply.
For example, you see the price of stock Y has been rising rapidly for a week now, and you realise that it has reached a level where it feels unreasonably high for its worth around ₹600. Around this price level, the buyers might become averse to buying a stock at such a high price and this will create a situation where the price will take a downtrend, making the ₹600 level a resistance level.
How To Identify Support and Resistance Zones
Before we move forward, you must remember that these levels are not exact price points. The examples above were just to give you an idea, but a trader can rarely identify the exact price point in advance from where the price will reverse.
They instead aim to find price zones or levels around which the price will likely take a reversal. There are different ways to identify these levels to incorporate them into your swing trading strategies.
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Historical Price Trend
Historical data is one of the most reliable sources for identifying support and resistance zones. You can take a look at historical prices of a stock to identify its different patterns. This information is vital and can help you a lot if you study it to familiarise yourself with these patterns.
However, this information alone is not quite useful. Just because an event happened in the past doesn’t mean it will also happen again in the future. The key here is to also understand different reasons as to why such patterns occurred.
For example, you notice that the price of a stock suddenly fell last week from ₹550 to ₹250. Now you must try to find any possible reasons behind such a price change. If you find out that the promoters of the company are selling their stake, this is an unusual occurrence. It is the panic caused by this announcement that led to such a price fall. Hence, it is a rare situation and won’t occur every day.
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Fibonacci Levels
Fibonacci levels are derived from the famous Fibonacci sequence, where every next figure in the sequence is the sum of the last two digits in the sequence. A trader can use this indicator in two ways. Traders use Fibonacci retracements to find the best entry points when they see a trending market retrace.
Fibonacci extensions, the other part of the indicator, can be used to find target price points that can be the most optimal to achieve. When the market is in an uptrend, Fibonacci retracement lines act as support lines, whereas they become resistance lines in a downtrend. On the contrary, the extension lines act as resistance lines in an uptrend and as support lines in a downtrend.
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Previous Support and Resistance Levels
Just like historical prices, immediate last support and resistance levels are also helpful resources in formulating your swing trading strategies. You can try to find any previous patterns to easily spot them in future as well. However, do remember that these price levels will never be the same, but somewhat around the same zone. The price swings high and low, and every swing can be different. Hence, it won't exactly come back to the last support or resistance price.
Conclusion
Swing trading strategies are a part of different complex trading styles that experienced day traders often leverage to make profits. While it is complicated, it is not entirely impossible to learn. An understanding of support and resistance levels will help you get a better grasp on formulating your swing trading strategies. So make sure to learn to identify them well to attain maximum profits.
Frequently Asked Questions
Q1. Why does the price in markets swing?
Ans. Price swing in the market occurs due to changing demand and supply of a stock. When its demand and supply change, so does its price, making it swing upward and downward.
Q2. What are the different types of support and resistance levels?
Ans. There are essentially three types of support and resistance levels in swing trading strategies. They are fixed support and resistance levels, dynamic support and resistance levels and semi-dynamic support and resistance levels.
Q3. What are different tools I can use for support and resistance trading?
Ans. Depending on your understanding, you can use Fibonacci levels, pivot points, and moving averages. Intraday traders often also use price bands and trend lines in their decision-making process.
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