What Is Support?
In regards to price action, support is a price level (or price range) that provides opposition against downward movement. It can be created by prior local highs and lows, moving averages and other indicators, or even fundamental factors of an asset.
Support is the opposite of resistance, which inhibits upward movement. Together, the concept of support and resistance is one of the most important foundational ideas in technical analysis.
While not impenetrable, they act as limiters on trend.
Simply put, support helps prop prices up.
During downtrends, support often leads to bullish bounces, the beginning of consolidation, or full-on reversals. During overall uptrends, it often puts an end to pullbacks.
Logically, this makes areas of strong support a smart place to enter (or add to) long trades.
But practically, it’s not always this straightforward.
How Support Works
Like virtually all aspects of price action:
Support is a manifestation of the laws of supply and demand.
Price increases when buying pressure outweighs selling pressure.
In its simplest form, support is built on the way up. As buyers enter trades at specific prices, those prices tend to become support. The main reason for this is that if price comes back down to those levels, many buyers will be inclined to add to their positions or re-enter after taking profits. This can sometimes be seen via standing limit orders on the order book.
The greater the volume traded at any given price, the stronger the support is likely to be. There are a variety of tools you can use to represent this “volume profile” visually.
There is also a common rule of thumb that states:
“Broken resistance becomes support, and vice versa.”
That is to say, when price breaks above a level of resistance, that level has an increased chance of acting as support from then on. However, this is not guaranteed and you may want to wait for the level to be retested as confirmation. In fact, some schools of thought state that a price level is not officially support until it has been tested at least three times.
To some degree, support becomes stronger with more tests—though this is not a strict rule and even a potentially dangerous blanket statement.
More complex forms of support may stem from numerical relationships like fibonacci levels, moving averages, and other calculations. And even certain “round” numbers like $25, $100, or $1000 can act as a sort of psychological support.
Regardless, context is important. Blindly trading support and resistance is almost never a winning strategy.
A real trader knows they need more weapons in their arsenal.