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A few days back we published a blog in which we explained what candlestick charts are and how you can read them. If you missed that blog by any chance you can check it out HERE. In today's blog we will continue with the topic and explain to you how you can draw trend lines and find levels of support and resistance on these charts.
We will only use daily charts in the email as for long term investors, in our belief it only makes sense to check out daily, weekly or monthly charts. However, you can use these concepts in charts of any time frame. Before that...
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You must have heard the term ‘trending’ and ‘
Support and Resistance
Support - A price point where a stock starts to get enough buying pressure to sustain that price or starts going up from that point is considered to be a support zone.
Resistance - A price point at which a stock starts to get selling pressure and is unable to sustain that price or starts going down from that point is considered to be a resistance zone.
Note : Support and Resistance become interchangeable. When a stock price crosses a particular resistance level and gets corrected again it is found to take support at the previous resistance level.
Consolidation - When a stock is consolidating in a range then the upper boundary of that range is said to be the resistance level and the lower boundary is said to be the support level. When the stock crosses the upper boundary (resistance) and starts trending upwards it might in some time come back to the resistance level, take support there and continue trending upwards.
Source: Trading view
In the above image we can see that the stock has been consolidating between ~3000 and ~3400 levels. The 3000 level which acted as a resistance level at point A became a support level later and has acted as a support at point B, C and E. The upper boundary of this consolidation has acted as a resistance at point D and a few other times.
Trend line - It is not necessary to draw support and resistance lines horizontally, you can draw them at an angle as well. These lines are called trend lines.
Source: Trading view
As we can see in the above image, the trend line has acted as a support at point A, B and C, while it has acted as a resistance at point D.
How we might use this - As fundamental long term investors, we DO NOT decide which stock to buy based on chart patterns. However, if we have a buy rating on ABC stock, then we can use these charts to identify good prices to accumulate.
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