Support Level
A support level is 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.
Definition: A support level is a price level that an asset does not fall below over a period of time. When the asset price drops to this level, buyers typically enter the market, causing the price to stop falling and rebound. Support levels are crucial in technical analysis as they help investors identify buying opportunities.
Origin: The concept of support levels originated in the early stages of technical analysis. Technical analysts observed price charts and noticed that certain price levels repeatedly acted as the “bottom” for price declines, forming support levels. This concept became widely used in the early 20th century and has evolved with the development of technical analysis tools.
Categories and Characteristics: Support levels can be categorized into static and dynamic support levels. Static support levels are fixed price levels that do not change over time. Dynamic support levels, on the other hand, change over time and are often associated with technical indicators like moving averages. The advantage of static support levels is that they are easy to identify and use, while dynamic support levels better reflect real-time market changes.
Specific Cases: Case 1: Suppose a stock's price has repeatedly dropped to around 50 units over the past few months but has always found support and rebounded at this level. This indicates that 50 units is a significant support level for the stock. Case 2: In the forex market, a currency pair's price has repeatedly dropped to the 1.2000 level but has always found buying support and rebounded at this level, indicating that 1.2000 is a significant support level for the currency pair.
Common Questions: 1. Are support levels always effective? Support levels are not always effective; market sentiment and external factors can cause support levels to be breached. 2. How to determine the strength of a support level? The strength of a support level usually depends on the number of times the price has rebounded at that level and the trading volume. The more rebounds and higher the volume, the stronger the support level.
