The social distancing restrictions associated with Covid-19 impacted businesses worldwide, causing stock market volatility. Figures show, however, that investments that considered ESG factors fared better during the pandemic.
Such stocks are now being purchased by investors all over the world. ESG investing, in general, refers to investing that places a priority on the best environmental, social, and governance (ESG) elements or results. It is widely regarded as a means of sustainably investing. With this in mind, it is critical to understand support and resistance levels when trading stocks.
Many traders use support and resistance levels to determine whether to buy or sell a stock. In this article, we’ll look at these concepts and see how they apply to stock market trading.
Understanding Support and Resistance Levels
Prices move because of supply and demand. Prices fall when supply exceeds demand. When demand exceeds supply, prices rise. Most trading platforms include tools to help traders identify support and resistance levels, such as moving averages and trendlines. A support level is a price a stock has not fallen below more than once. Support occurs when a downtrend is expected to pause due to a demand concentration. For example, assume Meta stock fell to $110, then rose to $150, then fell to $110 again, and then rose again. The support level would be set at $100.
Resistance is the price that cannot be exceeded more than once. Where there is a concentration of supply, resistance occurs when an uptrend is anticipated to pause momentarily. For example, suppose the Meta stock reached $150, then dropped to $110, then increased to $150, then dropped again. $150 would be named the resistance level.
Stock Market Volatility
Volatility measures the rate of fluctuations in a stock’s price over time. A highly volatile market is typically unpredictable, with stock prices rising and falling quickly.
On the other hand, a stock is said to have low volatility if its price movement is relatively stable, with slow and small changes in value.
Changes in other markets, interest rate hikes, political instability, and other global events, such as a pandemic or a war, typically cause increased market volatility. However, downward volatility can provide excellent entry points for long-term investors looking to buy stocks of good companies at what could be value prices.
Impact of Support and Resistance Levels on Stock Market Volatility
In the stock market, there are typically three types of participants at any given price level: those going long, those going short, and those on the sidelines waiting to place a trade. In addition, resistance and support levels significantly influence the number of bears and bulls. These zones influence traders’ decisions, thereby affecting market volatility.
You might want to understand support and resistance for a few reasons. First off, It is just common market lingo. Second, it assists a trader in anticipating where prices may bounce and reverse course. Finally, market momentum is extremely bearish or bullish if an asset price breaks through support or resistance.
Trading Strategies for Support and Resistance Levels
The three top strategies for trading with support and resistance are as follows:
Range trading happens between support and resistance levels, with traders buying stocks at support levels and selling stocks at resistance levels.
Price will frequently break out and begin trending after a period of directional uncertainty. Traders often seek breakouts below or above support to profit from increasing momentum in a single direction.
The trendline strategy
The trendline strategy makes use of the trendline as support or resistance. In a strong trend, the price will bounce off the trendline and continue to move in the direction of the trend.
While market volatility does increase risks, there are potential investment opportunities for those who understand how to use volatility to their advantage and practice good risk management. The explanation for support and resistance levels is simple, but mastery often requires years of practice. Always have a backup plan if the market does not favor you.