What Are Support Levels?
Support levels represent the price points at which an asset typically does not fall below for a certain period. These levels materialize when buyers enter the market whenever the price dips.
An easy way to chart support levels in technical analysis involves drawing a line along the asset’s lowest lows during the analyzed timeframe. This support line can vary—it may be flat, upward, or downward sloping based on the broader price trend. Additional indicators and techniques can help ascertain more advanced support levels.
Key Takeaways
- Support levels are price points that an asset finds difficult to fall below over a given duration.
- They can be identified using various technical indicators or by drawing lines that connect the asset’s lowest price points.
- Incorporating trendlines and moving averages offers a dynamic view of support levels.
- Breaches in support during an uptrend might indicate a reversal.
Importance of Support Levels
Support levels illustrate where buyers start purchasing an asset, preventing it from falling below a specific price point. It signifies a recurring floor price. These levels become evident when prices fall towards the support mark and then recover. Once breached, the lower price marks should redefine the support level.
Both support and resistance levels shape the essence of technical analysis. While fundamental analysis relies on company performance and historical data, technical analysis leverages price patterns and trends. Support levels may also be influenced by traders and investors’ limit orders or overall market activity.
Traders depend on these levels for strategizing their trade entries and exits. Depending on supporting indicators, a support level breach can hint at an ideal purchase time or even short-selling prospects. Especially during an uptrend, such breaches might confirm a trend reversal.
Example of Using Support Levels
Imagine you are analyzing the price history of shares belonging to the fictional Montreal Trucking Company, listed under the ticker symbol MTC. Your goal is to time your entry into a long position.
Consider that MTC traded between $7 and $15 in the past year. In month 2, it hit $15 but declined to $7 by month 4. Again, it touched $15 by month 7 and dropped to $10 during month 9. By month 11, MTC returned to $15 before falling to $13 over 30 days, then again climbed to $15.
By now, you identify a support level of $7 and resistance at $15. You’d set a buy order near the $7 support if no adverse technicals or fundamentals arise. However, setting your buy order precisely at this support risks it not being executed due to a probable uptrend. It’s wise to juxtapose several nuanced indicators alongside fundamental support.
Limitations of Using Support Levels
Treating support as a theoretical concept rather than as a true indicator is pertinent, as top indicators like price-by-volume charts and moving averages fold in these concepts more effectively. Viewing support as a band—rather than a single line—accommodates minor market variations better.
Trading Volume: Key to Confirming Market Trends
Trading volume measures the number of trades made within a set timeframe. It can refer to an individual security or the entire market and serve timeframes as brief as one day or longer observation durations.
The Power of Moving Averages
A moving average is a technical indicator showcasing data changes over time. It projects trend directions based on diverse data types, often re-calculated throughout the trading day to reflect updated values.
Understanding Resistance Levels
Opposed to support, resistance levels are where an asset struggles to exceed due to overwhelming selling forces. Visualize resistance levels as ceilings the stock has difficulty breaking through.
Conclusion
Various technical indicators besides simply drawing lines can reveal support levels, serving as a pivotal trading tool.
For those keen on mastering support levels and broader technical analysis aspects, consider seeking opportunities for formal courses that delve deeper into these concepts.
Related Terms: resistance level, moving average, trading volume, limit orders, trendlines
References
- FOREX.com. “Support and Resistance”.
- Capital.com. “Trading Volume”.
- CFI Education. “Moving Average”.
- Fidelity Investments. “Support and Resistance”.
