Support

Support is a critical concept in technical analysis, referring to a price level at which an asset has difficulty falling below.

Support can be described as:

• A price level at which an asset has trouble falling below: this is where the downward movement of the price tends to slow down or reverse, as the asset repeatedly bounces back up when it reaches this level;

• A price level at which buying is expected to take place: at support levels, traders expect demand to increase, as buyers perceive the asset to be undervalued and seek to purchase it, stabilizing or driving the price higher.

In forex, support levels play a crucial role in trade strategies, helping traders identify potential entry points, manage risk, and determine stop-loss orders. Traders observe historical price reactions to identify these levels, often at points where previous price drops have been reversed.

Support levels are often established by previous lows on a price chart, reflecting points where the market has shown a strong reaction. For example, if EUR/USD repeatedly bounces back at 1.1000, it becomes a support level.

However, support levels are not permanent; they can be broken during strong bearish movements. If the price drops below a support level, it may transform into a resistance level, where selling pressure causes the price to reverse.

Traders use support levels to identify opportunities to enter trades, expecting the price to rebound from these levels. For example, if GBP/USD has a strong support at 1.2000, a trader might buy when the price approaches that level, anticipating a bounce.

These levels also assist in managing risk by providing logical points for setting stop-loss orders, which limit losses if the price breaks below the support level.