How To Calculate Support & Resistance Levels - Chart of MIC Electronics

How to Calculate Support & Resistance Levels Chart of MIC Electronics
by Shabbir Bhimani on June 14, 2011 Vamsi asked question about MIC Electronics Limited and though I have suggested him thought emails what all levels to look for I think this stock offers lot knowledge about how to calculate supports and resistance for the stock. I dont track the stock myself and so I will not talk about fundamentals of the company but will suggest everything based on charts and technical. Let us look at the stock charts for past 1 year.
As you can see some numbers and horizontal lines in the above image. Let me explain each number. 1. Stock was purchased at around 33 in the month of January. It was clearly not the right time to buy this stock because of clear break down in the stock charts forming lower bottoms from 40 to 36 to 32 and finally to 28.
2. If purchased at around 33 in January, we should have a strict stop loss at the last support levels of 28. I would have taken this position if and only if I am fine risking my 5 Rs per share because this is very high risk trade because you are trying to get into a stock which is falling for last few days. Few days after the purchase, stop loss is hit but the fall is very sharp. Either use the stop loss in the fall or wait for a bounce after the fall to exit the position. 3. Point 3 clearly shows that we have a strong bounce after the fall and I prefer to use the bounce to execute my stop losses. A point to note here is the bounce can never take the stock pass 28 which was a support and is now acting as a strong resistance. See Why Support Becomes Resistance When Broken 4. 28 is a strong resistance and this is confirmed once again with the formation of double top. Stock opens above 28 on a day but could not close above 28 clearly suggesting it as strong resistance. 5. Many a times we want to see if the resistance is taken out or not but this has to be done again with a new stop loss. 22.5 should be the second stop loss from that point because you could see the stock bouncing from that level. 6. As we did miss everything now we have no option but to have the stop loss of 16.5 and hold on to the stock. I hope this helps other fellow traders understand the market technically.
Hello yankie, I don't know about the God Job, for that matter I'm not even too certain about a good job. Ok, keep in mind that pivot points are short-term, over-night trend indicators, useful for only one day at a time. They need to be recalculated every day using the changing price movement. When you are coming in with a bunch of calls, you need to study the historical data for each stock, determin the direction of the trend, it's strength, buying interest, liquidity, historical supports and resistances (which the pivots R1 S1 etc do not povide), etc etc...For each of the above there is a combination of indicators that need to be studied, compared and analysed, entry and exit levels determined, and in a progressing trade, trailing stops need to be detemined etc etc etc... As for your formula, the proper way of writing it would be: P = (H + L + C) / 3 R1 = (P x 2) - L R2 = P + (H - L) S1 = (P x 2) - H S2 = P - (H - L) But for making calls for short, mid, long term trades, do not depend on the formula. Do an in depth study. Good wishes.
Pivot Points and Daily Support and Resistance

Markets, no matter in what they deal, exist to facilitate trade, nothing more, nothing less. As such prices will continually fluctuate between supply and demand to enhance the exchange process. The market abhors a stand off, it cannot exist in a state of paralysis. So market traders will constantly adjust bid and ask prices to keep the exchange going - a combination of a traditional auction to seek top prices, then switching to a Dutch auction to explore for a price bottom. As prices continually rotate to enhance trading, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels. This is the basis of Market ProfileTM (MP) analysis. Distinct patterns of volume and price behaviour can be recognized using MP profiles. MP illustrates that the majority of trading in a day is by floor traders or "locals" as they are called. These locals constantly take prices up and down to very short term levels of support and resistance, exploring the narrow limits of price/valuation tolerance. Trading for the day will persist between this narrow range unless "outside" buyers and sellers are attracted to the price changes that occur. If the narrow range of support or resistance established by the floor traders can be wrestled from them, then off floor short term traders will be attracted and enter the market, as buyers if short term resistance is overcome or as sellers if short term support is violated. These breakout points then usually reverse their function and serve as test points, i.e. previous resistance becomes support and previous support becomes resistance. Now the active range of trading expands as the off floor traders enter the fray. If more longer established support and resistance can be successfully breached during the new short term trend that emerges, with the activity of the off floor traders, then longer term traders, position traders, with an intermediate or long term intention of their market commitment will be attracted to join the market. If one knew the range parameters of support and resistance used by floor traders one would have a handle on the significant areas where off floor and possibly position traders may take over the market direction from the rotating locals. Well the locals calculate from the previous day's range the pivotal or inflexion price and the areas of support and resistance. The calculations are very simple and the results invariably have an influence on the market activity of the day. In fact, if no other information that relates to the market becomes available then the locals' parameters may dominate the day. The calculation for the new day are calculated from the High (H), low (L) and close (C) of the previous day.
Pivot point = P = (H + L + C)/3 First area of resistance = R1 = 2P - L First area of support = S1 = 2P - H Second area of resistance = R2 = (P -S1) + R1 Second area of support = S2 = P - (R2 - S1)
So unless significant market news has been made available between yesterday's close and today's opening you can expect locals to take prices to test the near term support and resistance and the pivot price. Should, for any reason, these near term support and resistance areas fail then the second such area will likely be tested. If these support or resistance areas fail, because of market influencing news or observations, the off floor or, more particularly, intermediate term positional players will likely enter the market and make the market trend. So these floor trader pivot points are areas to be aware of and respect. They are both dangerous and areas of opportunity. Stop orders to enter at these points are readily whipsawed by 'floor sweeping' by the locals as they rotate up and down the perceived range. On the other hand, if you find support or resistance was forthcoming as appropriate it offers a low risk entry point with a close Stop loss point identified. On the other hand, failure of anticipated support and resistance, as appropriate, offers a low risk entry point with a close Stop loss point identified in what is likely to be a trend emerging from the 'local' noise of the market. Even if you are not a day trader, knowing the key pivot, support and resistance points can help the short term off floor and intermediate positional trader to identify potential entry points and stop loss levels for your trade if your other criteria have determined the direction in which you should be trading. Make it a daily ritual, calculate the pivot point and the areas of support and resistance after the close each day for the markets you are interested in. Study the next day's price action in the context of those pivot points so that you get familiar with the dynamics of the market.

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How to Calculate Support & Resistance Levels Chart of MIC Electronics

Pivot Points and Daily Support and Resistance

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