Definition
In finance, the term “Support” or “Support Level” refers to a price level below which an asset’s price does not seem to fall. It’s a threshold that the market price has trouble falling below due to strong demand or buying interest. Essentially, it’s the level at which buyers tend to enter a market to purchase a security preventing its price from falling further.
Phonetic
The phonetic spelling of “Support” (Support Level) is /səˈpɔːrt/.
Key Takeaways
- Definition: Support Level — often called ‘support’ — refers to the price level at which an asset often stops falling due to demand, technic analysis and emerging consensus that the asset is underpriced. It’s a key concept for traders analyzing market dynamics.
- Identification: Support levels are usually identified by analysing an asset’s chart and identifying points where its price has stabilized after a period of decline. These levels can be subjective, as they can change rapidly with market sentiment.
- Function: Traders often use support levels to help make decisions about buying, selling, or holding an asset. When a price reaches a support level, it can signal that the asset may soon increase in price. However, if the price falls below the support level, it may continue to fall until a new support level is found.
Importance
The term “Support Level” or “Support” is a significant concept used in Technical Analysis of financial markets. It represents a price level or zone that a security has struggled to fall below over a specific period. The support level is crucial as it typically signifies a market perception that a stock, commodity, or any other financial asset won’t tumble below this level. This, in turn, leads to more buying intensity than selling, subsequently causing the price to bounce back up from this level. Additionally, financial analysts and investors use the support levels to identify strategic areas where they can place buy orders and protect themselves against excessive losses. Thus, understanding and identifying the support level effectively could lead to profitable trading opportunities.
Explanation
The purpose of a Support Level in finance and business is to indicate the price level at which an asset consistently bounces back due to increased demand or buying activity. This happens because investors perceive the asset as undervalued or cheap at this level and jump in to buy, creating a floor or ‘support’ against further price fall. Essentially, the support level is used by traders to anticipate the price level at which an asset could potentially rebound. Traders utilize this concept to make decisions about when to enter or exit a trade, aiming to buy at or near the support level to take advantage of the possible upward rebound.In addition, identifying the support level is crucial for market analysis as it helps investors understand market trends and patterns, and predict possible future movements. If the price of an asset falls and rebounds from the same level several times, it strengthens the credibility of the support level. If, however, the price falls below the support level, it might indicate a bearish trend, triggering a sell-off as perceptions shift, and the previous support level could then become a new resistance level. Hence, the support level serves as an essential tool to help investors minimize risks and enhance potential returns.
Examples
1. Stock Support Level: One of the main places where the concept of support level is used is in stock market trading. For instance, let’s take Apple Inc. stock. If over a specific time frame, Apple’s stocks keep dropping to $120 and then rebounding, we can identify that $120 is a support level. The idea is that there is a certain quantity of buyers willing to invest once the stock hits that price, preventing it from dropping further.2. Cryptocurrency Support Level: Similar to stocks, cryptocurrencies like Bitcoin also have support levels. For example, if every time Bitcoin’s price drops to $30,000 it begins to increase again, that indicates a support level. Traders and investors will use this information to make decisions, assuming that unless significant events occur, the price will likely not go below this level.3. Foreign Exchange (Forex) Trading: In Forex trading, for instance, if 1 USD consistently equals around 0.85 EUR before bouncing back to earlier levels, the pairing of USD/EUR has found its support level at 0.85. Traders would use this support level to gauge whether it is a good time to buy or sell their currency pairs.
Frequently Asked Questions(FAQ)
What is Support (Support Level) in finance and business terms?
Support, or Support Level, refers to a price level where a security frequently stops falling because demand is strong enough to outweigh supply. It is the level at which buyers tend to purchase or enter into a stock or any other security.
How is the Support Level determined or calculated?
The Support Level is usually determined by looking at the historical performance of a stock or security. It is typically put at a level where the price of the asset has historically had difficulty falling below, identified through technical analysis using charts and patterns.
How does Support Level impact investment strategy?
A Support Level serves as a guideline or reference point for traders when making buy or sell decisions. It often indicates a good point at which to buy or enter a position, as it is seen as the level the investment will not drop below.
What happens if the price of a security falls below the Support Level?
If the price of a security falls below the Support Level, the market is showing that sellers have overtaken buyers. The Support Level is then considered broken and it might become a new resistance level.
Does the Support Level always guarantee that the price will not fall below it?
No, the Support Level doesn’t give any guarantee. It’s an indicator based on historical price data and signals a strong buying interest at a particular level, but market conditions and sentiment can change, causing the price to fall below the support.
Can a Support Level change over time?
Yes, Support Levels can and do change over time as market realities and investor perceptions shift. When a Support Level is broken, it could become a new resistance level, and vice versa.
What’s the difference between Support Level and Resistance Level?
Support Level represents a price level on the downside which the stock has had difficulty falling below. The Resistance Level, on the other hand, is a price point on the upside that the stock has trouble breaking above – where selling pressure overcomes buying pressure.
Related Finance Terms
- Resistance Level
- Technical Analysis
- Trend Line
- Stock Market Chart
- Volume Analysis
Sources for More Information
