Last Updated: Jul 22, 2022 Value Broking 7 Mins 2.4K

The proper entry and exit points hold the key to placing successful trades. A trader can profit only when he enters and leaves a position at the right time. To execute the trades properly and generate good returns, the traders must identify target prices. One good way to find a precise target price is to mark the support and resistance points. The support level or simply support is the price below which it may not go down within a time frame. The resistance, on the contrary, is the upper price limit above which the asset’s price may not go. Both support and resistance are particular price points on the price action chart of an asset. These price points are indicative of extensive amounts of buying or selling of the asset. 

For now, let us concern ourselves with the support level and have a closer look at support in the stock market. It is the price point for determining the minimum price at which asset trends in a time period. The traders expect there will be maximum demand and intensive buying of the asset at the support level. They assume it to be the floor price of a particular asset for that period of time. In most cases, the asset prices do not rise again if they reach the support line. The support level always lies below the current asset price, which is trending in the market. 

Generally, it is highly likely the price will fall until the support and then consolidate. Once the demand starts increasing, the price will again start to move in the upward direction. In fact, when the price of an asset goes down very much, many investors try to buy it. This leads to the formation of the support level. In technical analysis, we can draw the support line on the price action chart of an asset. For this, we need to join the lowest lows on the chart for the assumed time period. Based on asset price movements, the support line can be a flat one or slope upward or downward. 

Drawing the support level on a chart

Follow these steps to construct the support line.

  1. In case you want to spot the short-term support levels, load the data points of 3 to 6 months. However, if you want to know the long-term support line, you need to load the data points for at least 12 to 18 months. The short-term support levels are useful in intraday and buy today, sell tomorrow (BTST) trading. Whereas the long-term support levels are good indicators for swing trading. 
  2. Next, find and spot three price action zones. One requires a minimum of three price points in order to draw the line on the chart. These points generally show one of the following characteristics. You can spot them on the basis of these characteristics.
    • Tend to stop going up after a small upward movement.Tend to slide down after a small downward movement. Show a sharp reversal in movement at a specific price.
  3. You need to identify the three price action zones at an equal price range.
  4. Finally, connect the three points with a horizontal line.

Use of Support Levels in trading

As the price of an asset moves near its support level, the support level holds. This is the confirmation of the support. However, this may not happen every time, and the asset price can continue to move below the support line. A new support level will now emerge to accommodate the new lows. Generally, many investors or traders enter a position to buy an asset as it approaches the support levels. This is because the prices of an asset touch the support line in a very less number of cases. They consider these asset prices to be an ideal opportunity to invest in them. 

Another way traders use the support very effectively is by selling the assets if they think their price may further move down. In this way, they limit their losses. Further, some of the traders use this support level to place their entry and exit points while trading. A breakdown happens when the price of the asset dips below the support line. As the price of an asset breaks its support level, traders see it as a chance to take short positions.

In some cases, this breakout can take place in an uptrend. This can give us a signal of a trend reversal. A great number of traders and analysts use a variety of other technical indicators to find out enhanced support levels. 

The two kinds of support

There are two kinds of support levels that can occur in a trending market. The first one is the horizontal support line. In this, the price of assets stops moving down at first. Then the price starts to move up at various points in time. These lows form at nearly equal levels. The second type is the diagonal support. Like the horizontal support level, the lows form the diagonal support line. However, the key difference here is that each of the lows is higher than the previous one. This happens because of the fact that the asset is trending in an uptrend. In this case, the acid price first stops moving down. Following this, the price goes down once near the diagonal support level. Then it continues to follow an upward trend. 

Minor and major support levels

The minor support levels do not hold for longer periods. In case the asset is trending at a lower price, it can go up and again start falling. The low is the minor support level as the price dips below it and again reverses back. As the asset is in a downtrend, there is a high possibility that its price will easily cross the minor support line. This indicates that the downtrend is still prevailing. If the price trend reverses and moves up close to the previous low, it is a sign of a developing trend. If the reversal occurs above the previous low, we will get a higher low. This shows that there can be a trend reversal altogether.

The major support levels generally are the ones that lead to the latest trend reversals. A downtrend comes to an end, and an uptrend usually starts in the strong support line. Another thing to note is that if the price moves back to major support levels, it may not break through the level so easily. 

Support levels and technical analysis

Both the support and resistance levels are very crucial for technical analysis. The fundamental analysis focuses on a company’s inherent business structure and works on estimating its future performance. This includes finding the cash flows, P/E ratio, and other qualitative metrics. On the other hand, technical analysis uses price trends and patterns to determine an asset’s performance. The support level, which tracks the asset price movements, is thus closer to technical analysis. It takes into account the trading prices and volumes of an asset rather than a company’s business outlook.

Conclusion

The support level is a price point below which the assets generally do not go. We obtain it on the price action chart of the assets. The support price always forms below the present market of the asset in a given time frame. The traders get helpful insights for trading in a lot of assets using this indicator. They try to obtain trade signals to execute profitable trades. While most of them enter the trades when the assets trade near it, some others sell assets to minimize losses. Yet, a few others use the opportunity to short sell the position and take profits. The support level comes under technical analysis. One can even use other indicators to get better results.