Support and resistance is often thought of as a price level. For example, analysts and traders might discuss support for Nifty futures contract is at 4850. As a trader, if you are looking for a place to go long would you wait for the market to actually trade at 4850 before taking a position? Should you buy one, two or maybe fi ve ticks above the low and stop yourself out one tick through the low to manage your risk in the long position. If you wait for a test of support, you could miss a trading opportunity. The problem is thinking about support and resistance as a precise price level and this is where most traders err. It is very common for most people to think of support and resistance levels in terms of absolute price levels. For instance, if they are looking at Rs 50 as a resistance levels, they mean exactly Rs 50.

In reality, support and resistance levels are not exact prices, but rather price zones. So, if the resistance level is Rs50, then it is actually the zone around that 50 level that is the resistance. The stock may hit only 49.87 or it may hit 50.25 and still hold the Rs 50 as price resistance. One solution is to use price zones for support and resistance instead of price levels. Support and resistance zones give you a better trading opportunity. A risk taking investor may buy at top of support zone whereas a cautious investor may want to wait till the bottom of support zone.

The main factor in determining exactly how much the exact prices are tested by is how quickly or slowly the prices move into that resistance zone. For instance, if the zone hits very quickly on a large momentum surge, then it is more likely to hit that 50.25 level. This is also the case if the stock is a rather volatile one with a wide price range intraday. If the security spikes higher and does not quite hit the price resistance, such as a spike into 49.70, then it may round off into 50 with slightly higher highs and never exactly touch the Rs 50 price resistance zone before turning over due to the slowdown in momentum into that resistance. The larger the time frame, the greater the price zone is as well. A resistance zone at 50 on a weekly time frame may have a range of 1 Rs on each side of 50. Where traders tend to run into trouble is in thinking that because the stock has traded over 50 therefore the Rs 50 resistance has been broken, so we often hear of people “buying the highs” or “shorting the lows” in the case of support.

Resistance levels can transform into support levels and vice versa. After prices break through a support level, investors may try to limit their losses by selling the stock, pushing prices back up to the line which now becomes a resistance level.