Table Of Contents
Support Level Meaning
Support level (SL) refers to a point in the securities trading below which the price of the security does not fall. Traders determine the support level to time their buying at low prices and earn maximum profits from trading. Thus, it is an important indicator of trading opportunities.
(Source: fidelity)
At SL, the demand for securities is quite high as investors want to buy at a low price. Therefore, it builds buying pressure, pulling the prices of the securities back from falling further. As prices rebound from SL, they move up to the maximum price or the resistance level. Thus, buying at SL and selling at the resistance level ensures higher returns for traders.
Table of contents
- Support level (SL) is the threshold below which the security prices don't fall due to buying pressure from the traders.
- SL for any stock is established in a stock chart when the stock touches the lower price limit at least twice during the period of observation.
- Support and resistance levels are opposites of each other. The SL triggers buying of stocks, whereas the resistance level (RL) sets off the selling of stocks.
- Securities traders use SL and RL to determine the future price movements of any stock.
Support Level Explained
SL is a fundamental concept in the technical analysis of securities trading on the stock market. It reveals the price level below which the securities do not fall. This level can be called entry-level because investors believe that securities have become too cheap and, as a result, start buying them. This triggers the buying pressure, driving up the demand and hence the prices of the securities.
Usually, stocks move in a trading range that is determined by the support and resistance levels. SL is taken as the floor of the stock price where the market does not allow any further fall due to the demand pressures. As prices rally, stock prices touch the maximum price, creating the resistance level (RL). Beyond this level, traders find the stock too expensive to buy. As a result, the demand for the stock falls, and so does its price.
Thus, SL is established based on the simple principles of demand and supply. It is a point from which the buyers get more interested in buying securities, whereas the sellers become hesitant to sell. Thus, demand increases, and the supply decreases for the securities, holding up their prices. New SLs are created as prices breach the resistance levels and stay there.
How is the Support Level of a Stock Established?
A stock price chart is usually used to predict SL in stock trading. It is done by marking trendlines horizontally on it. The horizontal trendlines represent the opportunities for the traders to buy or sell stocks.
The trendlines are drawn where the price of the stock reaches the same high or low prices multiple times. For example, in the below image, we can see two horizontal lines—one is the red line, and the other is the green line.
The stock price touches the green line twice and bounces back to its original level. This green line indicates the SL of the stock in the share market. Now, the red line is the upper limit of the stock price, where it reaches twice and then falls back. This red line is called the RL of the stock.
In other words, SL for the stock is where buying takes place, and the resistance level signals the selling pressure of the stock. Many traders use the candlestick chart to understand the support and resistance prices in order to buy or sell securities. At SL, buyers overtake the sellers. This outcome is because the demand for securities increases to a maximum from the buyer side.
Effect of Support Level on Trading
A stock reaching an SL triggers a buying spree during a falling market. With active buying, its demand increases manifold, leading to support for its price. It prevents the stock price from nose-diving.
Furthermore, after every support, resistance occurs. Resistance is the opposite of support. At resistance, the sellers of the securities outnumber their buyers. Therefore, it helps stop the unlimited increase in their prices.
Thus, if a certain stock has reached its support price, it becomes a buying indicator for the trader. After buying the stock at the support price, the trader may wait and sell it for a handsome profit when it reaches the resistance price.
Defining the RL and the SL helps predict the future price movement of securities. The future pricing of the stock is important for traders to earn profit. Hence, the clarity of support and resistance areas of securities assist investors in timing the market well.
Chart
Let us look at this Gold Spot/ US Dollar Example to understand the concept better.
Individuals can observe the orange support lines drawn along with the resistance lines in the above chart. It represents the level at which the demand has enough strength to prevent the price from dropping further.
As we can see, every time the gets to the support level, for example, around the $1205 mark, sellers find it difficult to push down the price further. This happens because, at the support levels, bulls have the willingness to buy more while bears have the willingness to sell. On the contrary, at the resistance levels, prices go down. Here, one key thing to note is that resistance and support levels interchange when the price overcomes the zone. In case individuals want to observe more such charts showing support levels, they can find more on TradingView.
Examples
To make the concept of SL clearer, let's discuss some examples.
Example #1
The following is the stock chart of XYZ Inc.
From the stock chart, we see that XYZ’s stock price touched 60 multiple times from August 2000 to February 2001. It keeps on hitting this level and bouncing back. Buying is triggered as soon as the stock reaches the price band of 60.
The buying pressure is built because the traders feel that the stock is at its lowest price, and they can profit by buying it at this price. Thus, the demand for the stock surges driving up its price. This stopped the stock price from falling further. Therefore, this price level is the support level of the XYZ stock, represented by a green line.
Again, the red line indicates that the XYZ stock price reached here consecutively three times in a span of six months but was unable to breach it. Thus, this upper barrier is called the resistance level, which indicates that the sellers overtake buyers preventing further price rise.
Example #2
Here is the stock chart of ABC Inc.
The above chart shows two lines—red at the top and green at the bottom. As soon as the stock of ABC fall to the threshold limit of the green line, buyers start buying the stock, preventing a further slide in their prices. Thus, the threshold forms the support price of the stock of ABC.
Likewise, if we look at the red line of the resistance, we find that the stock of ABC never breaches the upper limit. Therefore, this limit is called the resistance level of the stock of ABC, where the traders start selling it to earn a profit.
Establishing the support and resistance levels helps determine the future stock price movements. In addition, traders can use it as an indicator of trading opportunities. Thus, they buy at the support price and sell at the resistance price to book in maximum profits.
Example #3
A recent Forbes report outlines the new support and resistance levels reached by Bitcoin and Ethereum from June to November 2021. Despite being fundamentally different from stocks, their trading patterns and price movements resemble securities.
For the above-mentioned period, Bitcoin's daily price chart displayed the resistance level at 68,000, while buyers supported the prices at 30,000. Similarly, Ethereum's resistance level stood at 4,750, whereas its SL was at 1,750 during the said period.
From the chart, it is clear that as soon as both these assets reached their resistance levels, sellers took control of the market, pulling the prices down. At the same time, buyers overcame the sellers when prices touched SL. Thus, these assets traded in the support-resistance range during the period, helping traders to time the market well.
Support Level vs Resistance LevelÂ
Resistance and support levels for a particular stock are opposite to each other. However, both are the two faces of the same coin. It means the resistance changes to support and vice versa under certain conditions.
Let us understand the difference between the terms SL and resistance level using the table below:
| Support Level | Resistance Level |
|---|---|
| 1. It is the lower price limit where security prices stop falling and rises up. 2. SL signals more buyers than sellers for a particular stock. 3. Traders tend to buy more at this price. 4. If a particular security breaches the support, then the new level will become the resistance for it. | 1. It is the upper price limit where security prices stop rising and fall down. 2. RL signals more sellers than buyers for a particular stock. 3. Traders tend to sell more at this price to earn a profit. 4. If a certain security breaks beyond the resistance, then the new level will become the support for it. |
Frequently Ask Questions (FAQs)
It is the level in the stock chart where the stock prices reach their lowest point two or more times. At this point, buyers start buying the stock back. This leads to a rise in the prices of the stock again. And when this happens multiple times during a time frame, SL is established.
For finding the SL of a stock, we need to carefully study its stock chart using the candlestick parameter for at least six months. After that, we should observe those points on the candlestick where the stock prices had reached their lowest price at least two times. Then, when constructed as a straight line on the candlestick chart, these points will constitute the SL of the stock.
A support level indicates the price level at which buyers of a stock outnumber its sellers. This is because buyers don't expect a further dip in the stock price and consider it profitable to start buying it. Thus, it is an excellent indicator of entry into the markets.
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This has been a Guide to Support Level & its Definition. Here we discuss the support level of a stock in share market & compare it with its resistance level. You may also have a look at the following articles to learn more.
