Technical Analysis Guide – Part 2

Technical Analysis Guide - Part 2

This Blog is created to provide you with information about support and resistance as well as methods of trading supply and demand. It is one of the base foundations of Technical Analysis

Support and Resistance ( Technical Analysis )

What happens if you throw the season ball on the glass? It’ll bounce back for max. 3-to 4 times but after that, it’ll break the glass right?

It means the ball is taking support at the glass 2-3 times and if it continues it’ll break support (glass).

Resistance also works in the same way.

Support

Support is an area/zone where the market is taking support and bouncing back from that price. But if it continues hitting the same zone again & again, it’ll break that support and continue further down movement.

Support is the level at which demand is strong enough to stop the stock from falling any further. 

The reason is that as the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.

Resistance

Resistance is the level at which supply is strong enough to stop the stock from moving higher. 

The reason is that as the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy.

Support and resistance levels are points where the forces of supply and demand action.

These support and resistance levels are seen by technical analysts as important levels when determining market psychology and supply & demand.

The more often a support/resistance level is “tested” (bounced from that price), the more significance is given to that specific level.

When these support or resistance levels are broken, the supply and demand forces that created these levels are assumed to have moved, in which case new levels of support and resistance will likely be established.

When a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support.

Support and resistance levels can be identified by trend lines.

Psychological Support and Resistance levels form an important part of a trader’s technical analysis. Price ending with 00 or 000 , people often see these levels as a strong support and resistance. 

The price may hit the line and reverse, it could hover around the level as Bulls and Bears fought for supremacy, or it may punch straight through.

A trader should always exercise caution when approaching 00/000 levels in general acting as Support or Resistance.

Supply and Demand

This is the most important topic in technical analysis. People are still considering support & resistance as a Supply and Demand Zone. This is correct only 70%. But these things work completely differently.

How to identify Supply Zone?

The zone/area from where the market has fallen heavily is known as the Supply zone. To be eligible for considering supply zone, It should have min 2-3 long red candle.
Now some of you think about how these zones are created and why they work most time?.

See, the market runs by big institutional traders, hedge funds, FII, and DII. When they sell market orders, crores of rupees flow into the market which leads to the big red candle. 

But if they offload full quantity at once, the market will crash, so they wait to pull back or wait for the buyer to come in. 

As they reached the same price where the market fell, they get a chance to offload another quantity at the previous same selling price and it creates another same big red candle selling move, and might this move continue further also.

How to draw Supply Zone ?

To draw a Supply Zone, you have to identify the area on the chart where a strong selling move happened. At least 2-3 big red candles must be there on a higher timeframe to make it a valid supply zone.

Find the candle before the first strong/long red candle.

If the candle is green:
Mark the area from the open of the green candle to the high of the red long candle as Zone. This zone will act as a Supply Zone.

If the candle is Red:
Mark the area from the close of the red candle to a high of the red long candle as Zone. This zone will act as a Supply Zone.

You can mark the previous whole candle(either green or red) as Supply Zone instead of selecting close or open method.

How to draw Demand Zone ?

To draw a Demand Zone, you have to identify the area on the chart where a strong Buying move happened. At least 2-3 big Green candles must be there in higher timeframe to make it a valid Demand zone.

Find the candle before the first strong/long green candle.

If the candle is green:
Mark the area from the Close of the green candle to the low of the green long candle as ZONE. This zone will act as a Demand zone.

If the candle is Red:
Mark the area from the Open of the red candle to the Low of the green long candle as ZONE. This zone will act as a Demand zone.

You can mark the previous whole candle(either green or red) as Demand Zone instead of selecting the close or open method.

Now the main question is, how to trade Supply and Demand Zone?

Now it’s time to recall the previous chapter “Technical Analysis 1101 Guide – Part 1” in which we have learned about candlestick patterns.

How to Trade Supply and Demand Zone ?

You just need to remember 2 Bullish and 2 bearish candlestick patterns while the price comes at Supply/Demand Zone, but it doesn’t mean another candlestick doesn’t work. 

To make it easy for you to trade, I’m just using these 2 candlesticks but as you have a grip on these 2, you should look for another candle to find at this zone.

Bullish Candle

BULLISH-ENGULFING - Technical Analysis
hammer - Technical Analysis

Bullish Engulfing and Hammer(Wick Must be greater than twice the size of Body)

Now just focus on observation:

Technical Analysis Guide - Part 2 - InfoBuket

Image source : Google

In the chart, as you see when the price come to the demand zone the selling momentum started decreasing and candles are starting to become weak and a number of hammer/Doji candles started forming. 

So here you have to wait for the hammer/Bullish Engulfing( Green hammer candle is preferred for entry but can also take entry on red with 50% quantity) candle for entry.

As the next candle crossed to hammer/Bullish Engulfing candle, you can take entry with stop loss below the demand Zone. 

if you’re an aggressive trader, you can take the first 25% quantity at whatever price you get within the demand zone as soon as the candle touches the demand zone. 

Rest 50% entry after hammer candle formation and next 25% entry if the market gives follow-through action.

The first target should be 50-61.8% of the Fibonacci level/ previous selling move and the second Target should be the supply zone.
Keep trailing SL while your account started coming into the green.

Bearish Candle

BEARISH-ENGULFING- Technical Analysis
shooting star - Technical Analysis

Bearish Engulfing and Shooting Star(Wick Must be greater than twice the size of Body)

Now just focus on observation:

Technical Analysis Guide - Part 2 - InfoBuket

Image source : Google

In the chart, as you see when the price come to the supply zone the buying momentum started decreasing and candles are starting to become weak and a number of shooting star/Doji candles started forming. 

So here you have to wait for the Shooting star/Bearish Engulfing candle for entry.

As the next candle crossed to Shooting star/Bearish Engulfing candle, you’ll take entry with stop loss above the supply Zone. 

If you’re an aggressive trader, you can take the first 25% quantity at whatever price you get within the supply zone as soon as the candle touches the supply zone. 

Rest 50% entry after shooting star/Bearish Engulfing candle formation and next 25% entry if the market gives follow-through action.

The first target should be 50-61.8% of the Fibonacci level/ previous Buying move and the second Target should be the demand zone.
Keep trailing Sl while your account started coming into the green.

So that’s it for now.

Don’t forget to check out our more “Financial Market-related articles” to improve your learning & enhance your knowledge.

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