Using support and resistance levels in CFD trading in Malaysia
Table of Contents
First, we need to understand what exactly they mean:
A support level is a price at which demand for a stock is expected to increase if previous prices drop significantly because of an adverse change in its fundamentals or prospects. Investors would buy up the stock when it falls lower than its support level, adding buying pressure and making it more likely that the share price will bounce back from the support level.
A high selling volume (selling pressure) could also lead to a bounce-back from a support level. The strength of the bounce back is usually proportional to the volume of buying pressure at the support level, so that higher volumes will result in a stronger bounce-back.
In other words, if there is enough demand for stock at a specific price point, this price point would be considered a support level that can act as resistance in the future.
A resistance level refers to the opposite of the support level; it is an upper limit on prices set by supply (selling pressure). Prices cannot rise significantly beyond this upper limit without temporarily pausing or reversing how quickly they increased before reaching this resistance level.
Typically, high trading volumes accompany high resistance levels because many market participants need to buy up quantities of the stock before it can reach a higher price.
Resistance level price point
A resistance level is the highest price at which buying demand for a commodity might arise at any point in time. In other words, if there is enough supply of a stock at a specific price point, this price point would be considered a resistance level that can act as support in the future.
For prices to make significant advances beyond the resistance level, severe fundamental changes are needed in addition to an increase in demand. For example, company stock consumers may change significantly due to management teams’ new product releases or announcements.
Traders use price levels to determine how long their positions should be held or until they are closed out. The longer it takes to move towards a support or resistance level, the more likely the price will retrace before reaching this point. And since traders don’t have infinite resources or time to monitor positions, they must take mental note of these levels, so their positions are automatically closed if they reach the predefined levels.
For example, assume you bought 20 lots of Proton at RM1.65 after watching an interview by Li Chun, who revealed that the company is set to launch six new models in 2013. When the market opens later that day, you notice that prices start falling quickly; almost crossing your comfort zone (defined as a trading range between 1.62-1-64).
You then monitor the market for signals and news related to Proton. Upon realising that there is no significant lousy news coming out of Proton and many investors are not expecting the fall in prices, you decide to reduce your position from 20 lots to 10 lots. After a few hours, instead of finding support at 1.62 as expected, the price fell to 1.58 as more people started selling their shares.
Take profit at 1.64
In this case, it would have been better if you had taken profit at 1.64 because the chances are high that prices will rise back up towards this level soon since buying demand should be greater than selling pressure because there was no bad news announced by Proton or other market players after a price drop like this usually causes a bit of panic among investors who start selling their shares to take profit.
Monitor price movement
A better strategy would be to monitor the price movements for signals and signs before taking positions. This way, you can reduce your risk exposure since you know where support and resistance levels are located. By following this simple rule of thumb, it is possible to prevent losses by closing out your position when prices fall below a significant support level or rise above a critical resistance level.