A Support level is a concept in technical analysis that indicates when an asset reaches a price level that market participants are unwilling to continue selling, causing the price to stop falling.
Support is a price level at or near which accumulated demand may limit downward movement.
Support is a price level that an asset may find difficult to fall below when traders wish to buy near that level.
The closer the price is to the support level, the more buyers are active.
Learn about support levels
Support can be described as:
- A price level that is difficult for an asset to fall below.
- The price level at which buying is expected to occur.
The core of “support” in trading is the price level at which a currency pair’s downward trend may be paused due to increased demand or buying interest.
When price approaches this support level, demand is expected to begin to exceed supply and prevent price from falling below this level.
Typically, the market is reluctant to let an asset fall below its support level and buyers step in to increase the asset price again.
This makes them the opposite of resistance, which is the price level at which the market is unwilling to allow the asset price to rise further.
If an asset does fall below its support level, then that support level has “been broken“.
Understanding an asset’s support and resistance levels can help traders choose the best time to enter the market and where to place stops and limits.
Support levels are usually determined by previous lows on the price chart. They represent points in the past at which the market has shown strong reactions.
For example, if every time the EUR/USD pair fell to 1.1000, buyers stepped in and pushed the price higher, 1.1000 would be considered a support level.
However, support levels are not static and may be breached, especially during strong bearish (downward) movements.
If the price breaks below support, it usually results in a sharp decline as the support turns into resistance, and historically the market has seen a strong sell-off at this point.
Applying Support Levels in Forex Trading
Support levels play a vital role in Forex trading strategies, especially those based on technical analysis.
Traders use these levels to help determine when to enter a trade in anticipation of price bouncing off support.
For example, if a trader finds that the GBP/USD pair has strong support at 1.2000, they might decide to buy every time the pair falls close to that level in the expectation that it will rebound.
Support levels also help manage risk by providing a logical place to place a stop loss order.
In the example above, if a trader were buying GBP/USD at 1.2020 in anticipation of a bounce off the 1.2000 support, they might place a stop loss order just below that level (e.g. 1.1980) to limit Potential losses if support is broken.
Interpretation of breakout support levels
As mentioned before, support levels are not invincible obstacles and price can break through them.
A breakout of support indicates that bears (sellers) have won over bulls (buyers) at a specific price level.
Once a support level is broken, it usually becomes a new resistance level.
For example, if the 1.2000 support level for GBP/USD is broken and the price falls to 1.1950, the 1.2000 level may now act as resistance, preventing the price from recovering.
Summary
Support levels represent basic concepts in technical analysis.
They provide a measure of the price level at which a currency pair’s decline may be halted by increased demand.
Identifying these levels can help you make informed decisions about when to enter or exit a trade.
However, it is worth noting that support levels, like any other trading tool, are not infallible.
Market conditions can and do change, and what works in one situation may not work in another.
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