DEFINITION of support level
A support level is a price at which an asset may find difficulty falling below as traders look to buy around that level.
WHAT IT IS IN ESSENCE
Very often, the markets demonstrate they are not ready to let an asset drop below its support level. But buyers are appearing to raise the asset’s price higher again.
That makes them the opposite of resistance levels, opposite to the point at which the markets demonstrate they are not ready to let an asset’s price rise any higher.
If an asset moves below its support level, then that support level is either wiped out. And a new support level must be identified or reconfirmed if lots of traders buy the asset.
Recognizing where an asset’s support and resistance levels are can help traders choose the best time to enter a market. As well as where to put stops and limits. Support and resistance levels can be identified by trend lines (technical analysis). Psychological Support and Resistance levels form an important part of a trader’s technical analysis.
HOW TO USE
Support is where the price tends to stop falling. And resistance is where the price tends to stop rising. Trying to make trading decisions based on this vague definition will likely lead to a depleted trading account.
To use support and resistance effectively we first need to understand how asset prices typically move, so we can then interpret support and resistance from that framework. There are also different types of support and resistance, such as minor and major/strong. We expect minor levels to be broken, while strong levels are more likely to hold and cause the price to move in the other direction. With this information, we can start making better decisions based on support and resistance.
If the price stalls and reverses in the same price area on two different occasions in succession, then a horizontal line is drawn. To show that the market is struggling to move past that area.
In an uptrend, the price makes higher highs and higher lows. In a downtrend, the price makes lower lows and lower highs.