What Is the Support Level of a Stock, and How Do You Trade It?

What Is Support?

Support, or a 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.

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.

Trading With Support And Resistance

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 from 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. 

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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.

Those interested in learning more about support and other aspects of technical analysis may want to considered enrolling in one of the best technical analysis courses.

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