Abhay had been sitting at the computer for hours. He had opened a demat and trading account only a few weeks back, and like most beginners, he wanted to learn the ins and outs of the market before making his foray into the markets. Unfortunately, there was only so much he could learn by himself. After a point, it got quite confusing.
‘What I need is someone who can explain things to me in a simple manner,’ he thought. And when it came to stock markets and investments, Abhay knew the one person who could guide him through these concepts easily was Sunil, his downstairs neighbor. So, off he went to seek Sunil’s help.
“Hey Abhay,” Sunil greeted him. “I was just going to come up myself. So, tell me, what’s going on?”
“I’ve just decided to get into share trading.” Abhay confessed. “And I’m having some trouble understanding some concepts. Could you help me?”
Sunil responded with his ready smile. “Of course, I’m glad to help. Tell me, where do we begin?”
“So, I was looking at this concept called support. What exactly is ‘support’ with respect to the stock market? Maybe we could start with that,” Abhay ventured.
“Sure. It’s a good place to get started,” Sunil said encouragingly. “And it’s quite an easy concept too. Let me explain. You see, with respect to share trading and the stock market, ‘support’ or ‘support level’ is the value below which a stock’s price doesn’t fall. Support levels also exist for other assets like futures and options, commodities, or even indices,” Sunil explained.
“Okay,” Abhay acknowledged. He then went on to enquire, “But aren’t the prices of stocks always fluctuating? How do we know then that the price won’t fall below a certain level?”
“That’s easy, because support levels are calculated only for particular time periods. The validity of a support level for an asset is limited only to a certain period of time. It tends to keep changing very often,” Sunil clarified.
To help Abhay understand it better, he went on, “Let me explain this further using an example. Take the shares of Yes Bank, for instance. Currently, they’re trading at Rs. 28 per share. In the past 30 days, Yes Bank had seen many ups and downs. However, even among these wild swings, the share price refused to fall below Rs. 24. Therefore, we can conclude that the support level of Yes Bank for a 30-day period is Rs. 24.”
“Ah! That makes it easier now,” Abhay sighed in relief. But there was more. “I do have another doubt, though. How are support levels created?”
“That’s a very good question,” Sunil agreed. “Generally, a support level is created when there is a huge inflow of buyers purchasing an asset. For instance, this may happen if the price of that asset dips down.”
“Okay, that’s clear enough. I’m also curious about another thing. Abhay confessed.“Tell me, Sunil, what happens when the price of an asset touches a support level?”
“Well, one of two things is likely to happen when the price of an asset touches a support level. The price of the asset could either bounce back up, or it could fall even further,” Sunil clarified.
He then went on to add, “When the price of the asset bounces back up, the upward movement is termed as a reversal. If the price falls even further instead, the support level is said to be ‘broken’. Once a support is broken, a new support level is set after taking into account the new lows the asset has made.”
Abhay was intrigued. “That’s quite interesting, Sunil. Now, I’d like to look at a more practical aspect to this whole phenomenon. How important is the support level for an asset?”
“I’m glad you ventured into this territory, especially since you’re going to begin trading soon. You see, support levels are the core of technical analysis in share trading. If you’re going to engage in intraday trading, you can make use of support levels to determine the entry and exit points for your trades. Support is also extremely important not only for intraday trading in shares, but also for trading in derivatives like futures and options.”
“Alright then, I guess that clarified all my doubts,” Abhay declared. “You’ve explained it so simply and clearly, Sunil. Just a few minutes back, I was struggling to make sense of this concept. But now, it’s clear as day to me. And I can’t wait to find out more about intraday trading and about buying futures and options,” he said.
Before he headed out, he added with a grin, “I may just have to drop by for more such quick sessions with you, Sunil. Nobody explains these things better than you do.”