A support line represents an estimation of where a price is likely to stop moving downwards, based on recent data and analysis methods. It is arrived at with different formulas for different indicator methods, but it is generally a line derived from moving averages and standard deviation which represents a lower level at which traders would expect a price to rebound back upwards.
Several methods of technical and fundamental analysis plot a support line or two as part of a graphical representation of trends. Theoretically, a price will only deviate so far from its moving average before bouncing back toward the middle.
The support line is the bottom of this range and the resistance line is the top. When a price crosses the support line(s) it may indicate that a trend is starting or changing.
In technical analysis, the level of support is an imaginary barrier that keeps the price of a security from falling beyond a certain level. These levels do not have to be horizontal; the resistance and support levels can have either a positive or negative slope over time, gradually raising or lowering the barriers.
Stocks sometimes spend a while approaching these prices, or crossing them, only to bounce back to a value around their moving average. If a trend carries the price through the previously defined support or resistance level, it might be called a “breakout,” in which the stock goes on to trade in a higher or lower range than it used to, and different numbers become the support and resistance.
Analysts are always looking for chart patterns to identify trading opportunities. One such pattern, the Triple Bottom, appears when there are three distinct low points that represent a consistent support level – a type of formation that happens when sellers cannot break the support price, and market participants eventually pour in. The security tests the support level over time but eventually breaks resistance and makes a strong move to the upside.
Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. They may consider buying a security or a call option at the breakout price level. To identify an exit, traders should compute the target price by adding the pattern’s height (highest price minus the bottom price support level) to the breakout level (the highest high). When trading, wait for the confirmation move, which is when the price rises above the breakout level. To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to sell at or below the breakout price.
This is just one of the plentiful ways to utilize technical analysis in trading. Augmenting these methods with artificial intelligence tools to generate trade ideas, analyze signals to execute advantageous trades, or myriad other options can help investors make rational, effective trading decisions.