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A Quick Guide on SUPPORT LEVELS & DEMAND ZONES
Have you ever noticed how a stock quickly moves up after it drops to a certain price level? People say "the stock has taken support" or "bounced back from support level" Let's understand why the bounce happens;
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The basic logic behind support level (also known as demand zone) is related to how big institutional investors buy shares. When institutional investors take a position they have a huge qty of shares to buy & so they want the order to be filled at a particular price.{2/7}
Let's say the stock of XYZ Ltd. is currently trading at ₹525. But institutional investors want to buy 5 crore shares of XYZ Ltd. at ₹500. So they put in a buy limit order of 5 crore shares at ₹500. This order now remains pending in the order book.{3/7}
Now when the stock price comes down to ₹500, their pending buy order gets triggered and the massive buying quickly pushes the stock price up. What happens many a times is that not all 5 crore shares get filled because of the sudden jump in stock price at ₹500.{4/7}
Let's say out of the 5 crore shares they wanted to buy at ₹500, only 3 crore shares get filled and then the stock price zooms up. Now, still they have a pending buy order of 2 crore shares at ₹500. So ₹500 has now become a support level or a demand zone!{5/7}
Next time when the stock price again comes down to ₹500 it again gets a quick bounce up at ₹500 because of the pending buy order of 2 crore shares. Such partial fills are called "order legs" and usually institutional buying happens over multiple such order legs.{6/7}
For retail investors, it's important to identify such "support levels" or "demand zones" from where the price has quickly reacted and zoomed up. Getting the order filled at such levels is usually considered a good entry price as you're on side of the institutions.{7/7}
