Support is an important part of technical analysis trading because it helps you judge where to enter a trade. Continue reading to know how to use the support levels to look for higher probability trading signals.
The price of a security is driven by supply and demand. Support is formed where the market is expected to turn bullish from and from the level you should be a buyer in the market. The support is the level where the demand is at the maximum and thus the price is expected to become bullish from that level.
What is a support
Support is the level where the demand is expected to be very strong. It is the level from where the price of the security may not fall any further. The logic behind this is that when the price of the asset declines towards the level of support it gets very cheap. This is the price where the buyers are very keen to buy and the sellers are not interested in selling anymore. When the price reaches the support zone the demand will be more than the supply and this will prevent the price of the security to fall below the support level.
The support level may not hold always and there could be a breakdown of the level of support. This means that the bears have overpowered the bulls and have won. When the level of support gets broken this means that the willingness to sell in the market is still there and buyers are not very keen to enter the security.
When the level of support breaks this means that the sellers are ready to sell for an even lower price. Buyers are still not active and may be waiting for a lower level of support. Since a level of support is broken it is now void and a new level of support may be honored which will be placed at a lower level.
Where does the support level get established?
Support levels need to be looking for below the current pic of the asset. You need to look towards your left and down to find a level of support. It could be possible that the security is trading near the support.Technical analysis may not be completely exact and it could get difficult to point out the major support levels. Also, the price could be very volatile which could cause the price to dip a little below the level of support.
It is thus important that you place the stop loss a little lower than the level of support so that it gives room for the price to move before it starts with the upward move.