3/7/2020 Support (Support Level) Definition & Example

TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC EDUCATION

Support (Support Level)

By JAMES CHEN | Updated Nov 25, 2019

What Is Support (Support Level)?

Support, or support level, refers to the price level that an asset does not fall below for period of
time. An asset's support level is created by buyers entering the market whenever the asset dips
to a lower price. In technical analysis, the simple support level can be charted by drawing a line
along the lowest lows for the time period being considered. The support line can be flat or
slanted up or down with the overall price trend. Other technical indicators and charting
techniques can be used to identify more advanced versions of support.

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KEY TAKEAWAYS
The support level represents a price point that an asset struggles to fall below over a
given time period.
Support levels can be visualized using different technical indicators or simply by
drawing a line connecting the lowest lows for the period.
Applying trendlines or incorporating moving averages provides a more dynamic view
of support.

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3/7/2020 Support (Support Level) Definition & Example

What Do Support Levels Tell You?

In general finance terms, support level is the level at which buyers tend to purchase or enter
into a stock. It refers to the stock share price that a company rarely goes below. When a price of
stock falls towards its support level, the support level holds and is confirmed, or the stock
continues to decline and the previously demonstrated support level must change to incorporate
the new lows. Support levels in stocks can be created by limit orders or simply the market
action of traders and investors.

Support and resistance levels are at the core of technical analysis. Fundamental analysis takes a
company's performance and history into account to determine the future direction of the stock,
whereas technical analysis uses patterns and trends in price. Traders use support and resistance
levels to plan entry and exit points for trades. If the price action on a chart breaches the support
levels, it is seen as an opportunity to buy in or take a short position, depending on what the
trader sees fro other indicators. If the breach occurs on an uptrend, it may even be a sign of a
reversal.

Example of How to Use Support Levels

Let’s say that you are studying the price history of the price of shares in the fictional Montreal
Trucking Company, with the ticker symbol MTC. You are trying to identify an ideal time to enter
a long position in the company. Over the past year, MTC has traded between $7 and $15 per
share. During the second month of the period you’re studying MTC, the stock climbs to $15, but
by month 4 it has fallen to $7. By month 7, it climbs again to $15, before falling to $10 in month
9. By month 11 it climbs once again to $15 and over the next 30 days it fall to $13 before
climbing again to $15. 

Support

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3/7/2020 Support (Support Level) Definition & Example

Image by Julie Bang © Investopedia 2019

At this point, you have an established support level of $7 and a resistance at $15. If there are no
other worrying factors on the technicals or fundamentals, you can set a buy order at the lower
end of the range. If you set the order right at the support level of $7 there is a risk that an
uptrend will establish and your order may never be executed despite the fact that you correctly
identified the upside. This is another reason why it is important to consult more nuanced
indicators besides simple support.

The Difference Between Support Level and Resistance Level

If the support level is the price that a stock does not go below, the resistance level is the a price
point at which a stock has trouble growing past. Think of the the support level as the floor, and
the resistance level as the ceiling.

Limitations of Using Support

Support is more of a market concept than a true technical indicator. There are many popular
indicators that incorporate these concepts, like price by volume charts and moving averages,
that are more actionable than the simpler visualizations. Generally traders will want to see the
support band rather than a single line connecting the lowest lows as there is always a chance
support will move up and the order for a long position will go un-executed.

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Related Terms
Resistance (Resistance Level)
Resistance is the uppermost price level of an asset over a period of time. more

Speed Resistance Lines

Speed resistance lines are a tool in technical analysis that is used for determining potential areas of
support and resistance. more

Tirone Levels Definition

Tirone levels are a series of three sequentially higher horizontal lines used to identify possible areas of
support and resistance for the price of an asset. more

Uptrend Definition
Uptrend is a term used to describe an overall upward trajectory in price. Many traders opt to trade during
uptrends with specific trending strategies. more
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3/7/2020 Support (Support Level) Definition & Example

Zone of Support
Zone of support refers to a price zone reached when a security's price has fallen to a predicted low,
known as a support level. more

Price by Volume Chart (PBV) Definition

A price by volume (PBV) chart is a horizontal histogram plotted on a security's chart, showing the volume
of shares traded at a specific price level. more

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