Support is a price level at which a financial asset’s price failed to move below in previous attempts.
- Support levels are price levels where a financial instrument could face potential buying pressure, also known as demand zones.
- While usually horizontal, support levels can also form on trendlines, channels, and fibonacci retracements, among others.
- Limit orders and stop losses are often placed around support levels.
What is a support level?
Support levels are price levels where the value of a financial instrument failed to move below in previous attempts. Typically support is a horizontal level, although it can also form on trendlines, channels, and fibonacci retracements as well as some technical indicators. Support levels are used when analysing an assets price chart.
Using support levels provides traders with information that could help with entering and exiting the market. If a trader is expecting the value of an asset to go up, they can place a limit order to buy when a support level is reached. Traders who are anticipating the market to fall, can use support levels to place stop loss orders.
Support levels are often an indication of demand zones. These are levels or areas in the market where buying pressure appears to be strong. These types of levels form when there are more buyers than sellers, who push an asset’s price back up.
Types of support levels
Basic support levels are most commonly found at horizontal levels, although there are more ways in which support can be formed. Below, we’ve briefly covered a few of the most popular support levels traders use.
This type of support level is most commonly used and generally falls under two categories; dynamic and static. Dynamic levels are formed when the price of an asset has repeatedly failed to move below a certain price. Static levels are also known as round numbers. A stock could find support at £5, £10, and £20 for example, as they are round numbers.
Trend line support
When the price of an asset is moving in an upward direction, it will form a series of ‘dips’ often referred to as higher lows. These dips can be connected by a trend line, which is a diagonal line connecting the ‘dips’. After a series of dips, a trend line can often act as a support level and can be used as a place to ‘buy the dip’.
It is possible to find support levels by using technical indicators such as moving averages. These indicators plot the average price of an asset over a specific time period. A common moving average is the 200 day MA. Traders can use a moving average line as a support level, as an asset’s price will typically fall towards it before bouncing back higher.
Where can I learn more?
If you want to learn more about support levels or technical analysis you can check out our free courses section. You can also visit our stocks, cryptocurrency, and forex hubs where we have up-to-date news and market analysis.
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