A complete guide to support levels and how to find them A complete guide to support levels and how to find them A complete guide to support levels and how to find them

A complete guide to support levels and how to find them

Trading Strategies

Saxo Group

Knowing the lowest price a financial asset has reached over a sustained time can be useful. In trading, a low point can be described as a support level. It won’t necessarily tell you exactly when the right time to buy or sell is. However, when you combine it with technical indicators and market data, it can be a useful way to determine an asset’s current status.

This guide will define support levels in trading and explain how to use this information to make better decisions. 

What is support in trading?

Support, in general terms, is the price an asset doesn’t go below. You can think of support as the floor. The value of an asset will rise and fall, but it doesn’t go lower than the support level. This support level definition comes with some caveats. 

The first caveat is that identifying a support level requires time and analysis. You can’t look at a price chart and use a random low point as the support level. The point at which the price stops falling and rebounds need to be hit multiple times to be deemed a support level. So, the price must go close to the floor, but never beyond it, multiple times for a support level to be validated. 

The second caveat is that support levels aren’t fixed forever. They establish themselves over a certain period and, as a result, you need some data to confirm a price point has become a support level. However, sometimes the price of an asset will go beyond the support. This is known as a breakout or a breakthrough.

If the breakout is short-lived, the old support level might remain intact. For example, if the support was $1 and dipped to $0.90 for five minutes but didn’t reach that low again, we could say $1 is still the support level. However, if the price continues to hit or go close to $0.90, that would be the new support level.

This means you have to be fluid in your understanding and assessment of support levels. They are used to find the floor, aka the lowest price, an asset reaches before rebounding. But sometimes the price breaks through this proverbial floor and a new low is established. Therefore, support levels are fixed, but they’re not fixed indefinitely.

Support level: an example

A support level for Amazon stock could look something like this:

Day 1

Price High: $100
Price Low: $90
Price Average: $95

Day 2 

Price High: $110
Price Low: $93
Price Average: $101.50 

Day 3 

Price High: $105
Price Low: $91
Price Average: $98

In this example, the daily high moves around quite a bit. In contrast, the daily lows are all close to $90. Specifically, the price never drops below $90. Therefore, on a very basic level, we can say $90 is the support level in this example. 

What does a support level tell us? 

Support levels tell us the lowest price an asset will reach before rebounding. Again, this comes with a caveat. Support levels can be seen as theoretical low points. It’s a recurring low point, according to price analysis. However, there’s nothing to say the price won’t go below the support level. Trading is unpredictable. 

No one knows for certain how the markets will move. That’s why trading carries a certain amount of risk. It’s also why you can’t guarantee that a support level won’t be breached. However, using support levels is an attempt to bring some certainty to an uncertain situation. That’s the goal of technical analysis and any other type of analysis you do as a trader. 

So, you can use support levels to see the lowest price point for a financial asset based on evidence obtained over an extended time. You can use this information in three main ways: 

Entry and exit points 

You can use support levels to find when it might be wise to enter a trade. For example, if the current price of an asset is close to its support level but your analysis suggests buying activity is increasing, it could be a good time to open a long position. 

Stop-loss limits 

You can use support levels to set stop-loss limits. Although stop-loss limits should be based on your own financial tolerances, support levels can also be used as a guide. If you know $50 is an established support level, you can set a stop-loss just below it. 

The thinking here is that the market should naturally rebound once it approaches $50, which makes it a natural stop-loss point. However, if the price happens to drop below the support level, you’ve got your safety net (i.e. stop-loss) to limit any unexpected losses.

Market overview

You can use support levels to get a general overview of the market. If the price of an asset is constantly trading a lot higher than the support level, that’s a sign the market is strong. If the price is hovering around the support level, it means the market is weak and a breakthrough could happen. 

Support vs. resistance: what’s the difference?

It’s almost impossible to talk about support levels and not define resistance. We won’t go too far into the specifics of resistance levels in trading, but it’s worth comparing the two: 

  • A support level is an established low point the price of an asset hasn’t gone below. 
  • A resistance level is an established high point the price of an asset hasn’t gone above. 

You can see support and resistance as two price extremes: the low and the high. The support is the floor, the resistance is the ceiling. 

How to find a support level

There are three main ways to find a support level. Some strategies are more advanced than others. The simplest but most prone to error is the round number theory, while the most advanced strategy is technical analysis: 

The round number theory

This is less of a strategy and more of a theory regarding support levels. The idea is that prices tend to stick at round numbers such as $100. There are two reasons for this. First, inexperienced traders tend to buy or sell on whole numbers because it feels more intuitive. So, it somehow feels right to see it at $100 rather than $100.02. 

The second reason whole or round numbers can become support levels is due to institutional traders. It’s often the case that large investors use round numbers as stop orders. So, they tend to set buy or sell orders at a round number. Because they’re trading large amounts, this can impact the market and define a support level. 

Trendlines

Plotting trendlines on a price chart can help you establish support levels. The aim here is to connect the dots between daily low points. Once you can draw a line through these points, that’s the support level. 

Technical analysis

This is where you carry out technical analysis using price data to determine the moving average. The line created by moving average data will often be smooth, i.e. you get a straight line that develops over time. The moving average line can find a support level because it doesn’t fluctuate like individual price points. 

Basically, you’re looking at the average price over time to determine what the low point is. You can also use other technical indicators to determine what the support level is. One indicator that’s often used is Fibonacci retracement.   

The pros and cons of using support levels in trading

The main reason to establish and use support levels in trading is so you have an anchor point. If you know the lowest price an asset has achieved and rebounded from, you can make decisions based on that. If the price is significantly higher than the support level, the market is likely to be strong and vice versa. 

The downside to using support levels is that they’re just a concept. They aren’t technical indicators. A support line isn’t fixed and there’s nothing to say the price won’t go below it. This means you should use support levels with a sense of caution. Don’t see them as the ultimate line. Use them as a guide. Experienced traders often prefer to use support bands rather than lines. 

This gives you a price range rather than a single point. This can often be a better way to think about support because it allows for fluctuations. That doesn’t mean support bands are any less of a concept. Prices can fall below the lowest point in a range. However, it can be a useful way of determining the proverbial floor price of an asset. 

Thinking about support levels in this way can help you make better decisions when you’re trading stocks, forex, commodities and any other financial instrument. There aren’t any guarantees you’ll make a profit by using support data. But, if you combine support levels with other types of market data, you’ll give yourself a better chance of making the right moves.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.