What is a Zone of Support?
When a security’s price has dropped to a projected low, often referred to as a support level, a price zone known as a zone of support is achieved.
Understanding
Generally speaking, a zone of support is a range of price lows that the security has previously struggled to go below. Usually, the site of support is located around a support trendline. The price of the support trendline remains dynamic as long as security is traded, even if it may have a limited point on a technical chart.
Traders usually use technical analysis to determine a zone of support. On a chart, the site of support indicates a lower limit that the stock has not yet crossed. At the support level, volume is often modest, and supply dominates demand.
Traders may find lucrative spots inside a zone of support. These locations provide a chance for a reversal, much like zones of resistance. As a result, traders may find these zones lucrative trading opportunities using a range of various technical analysis patterns.
Using the well-liked envelope channel charting approach, a trader may continuously construct borders of support and resistance around the moving price of an asset. One of the most popular envelope channels traders utilize is the Bollinger Band® tool. This indicator plots trendlines for support and resistance with two standard deviations above and below the moving average of the price of an asset. The Donchian and Keltner channels are two more well-known envelope channels with support and resistance limits.
Traders may also use shorter-term trendlines to create tighter channels at securities’ high and low points. These channels, which may be used to locate a zone of support, are ascending, descending, or horizontal.
Areas in the support zone may be arbitrary. They are positioned near a support trendline, although this region sometimes has erratic price movement. Trading in a support zone may be bumpy due to market pricing mechanics and other traders using similar charting tactics.
Traders might use a few predetermined techniques to pinpoint trading indicators inside the support zone. The Fibonacci retracement is one. The three main channels of this technique are sideways, descending, and rising. By using percentages, the method determines the parameters, with 0% at the support border and 100% at the resistance boundary. The charting pattern provides intermediary lines to aid in identifying trading zones.
Sophisticated technical analysis charting tools may help draw support zones on a candlestick chart. Color-coded support and resistance zones in these software packages often represent the intensity of the support signals. Traders may frequently adjust the support settings in the charting program to suit their tastes.
Since support zone activity might help spot a reversal or further decline, traders usually watch it carefully. A trader may find that security is an excellent spot to purchase to profit from price rises if they think the security’s price will rise from the support zone. The trader’s most lucrative course of action would be to sell or short-sell holdings if they determine that the price is likely to continue its downward trend.
Example of Zone of Support
The Campbell Soup Company (CPB) chart below displays a distinct zone of support between $26.50 and $27.50 when two horizontal trendlines are added. The two trendlines link the price action’s key highs and lows over the previous 12 months. Traders might watch the support zone for a possible reversal to the upside or wait for a breach that would point to more declines. Because more market players are interested in trading from the zone of support, it offers a greater likelihood of region to trade from in both scenarios.
Conclusion
- When a security’s price drops to a support level, an anticipated low, it enters a zone of support.
- A lower limit the stock has not yet breached is a zone of support.
- A zone of support provides high-likelihood locations where a trend reversal or continuation may occur.
