The share prices are quite volatile and they keep moving because of an interplay of various factors. Even if the company’s profitability and other factors remain constant, the stock prices tend to change because of the fluctuating demand and supply of securities. As a result of the upward or downward trend in the market, the stock prices either rise or fall.
However, there are two price levels, resistance (high level) and support (low level) which are rarely breached despite the constant price movement.
These levels don’t mean much to long term investors, but the intraday investors, and the ones who carry out technical analysis for their buy and sell decisions, keep track of these levels regularly.
What is the support level?
The support level is a kind of price level that a stock reaches over time, below which the stock is not expected to fall. Once the stock reaches this level, its demand usually picks up again, triggering its price to rise again. This level is achieved when there are more buyers than sellers.
The support level is usually reached due to the aggressiveness of bears and bulls, and when a balance is established between the two, the support level is reached.
What is the resistance level?
Resistance is a high price level when it materialises, traders begin to sell. This sell-off causes the stock price to stop rising, and it starts to drop. It is the level at which there are more sellers than the number of buyers. There is a limit to the increase in price and thus resistance level is considered as the price ceiling.
The functions of both the levels
Both the support and resistance levels are the price levels determined via effective technical analysis to aid the traders take pragmatic trading calls. Once these levels are reached, the price movement tends to stop and gets reversed. These levels work as price barriers to control the excess supply and demand for stocks.
These two key levels of stock prices act as broad indicators of demand and supply of individual stocks, however, the investors are advised to consider other factors as well before taking the trading calls.