What is Support?

Support and Resistance • Lesson 1

So we talked a bit about the concept of support and resistance, but let’s kick it up a notch by looking at them separately, starting off with, support!

Basically, support is an area on the price chart, and more specifically under the current price, where the bulls put a halt on the declining prices as they find them attractive and enter the market with buy trades only to cause the prices to bounce up.

Now, let’s recall the definition of the uptrend because the two are related!

Remember, we previously mentioned that an uptrend consists of a series of successively higher tops and higher bottoms that kinda look like a zigzag path. Right? Good!

Now, the bottom, also known as the corrective dip, may be a good candidate for a support level. But why so much fuss about the support? What is so significant?

Well, imagine that during an uptrend a new bottom is formed near the previous one. How do you feel about it? How do you feel about the “health” of the uptrend?

Not sure?

Exactly!

If that happens, then it may be an early warning that the uptrend is coming to an end and the market is entering a sideways direction.

So, is a sideways market a good area to place a buy order or hold on to a buy trade? Maybe not the ideal!

Additionally, in a more extreme scenario, a violation of a bottom during an uptrend may be a warning for an impending reversal to the downside.

This is probably a signal to close any buy trades and book any potential profits or predefined losses as the reasons for entering the bull market have just ended.

One more example using a downtrend this time.

Remember that a downtrend is defined as a series of successively lower tops and lower bottoms.

Now, say that prices fail to decline lower to form a lower bottom as expected in a downtrend and instead they find support at the last bottom and bounce up to exceed the last top.

This shows that the decline has just come to an end and it also signals the very early stage of a new trend in the opposite direction!

So with this being said, is it wise after a reversal to still hold on to a sell trade? Maybe not!

Now you know what support is!

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