DEFINITION of ‘Zone of Support’
Zone of support refers to a price zone reached when a security’s price has fallen to a predicted low, known as a support level. A zone of support is typically identified from technical analysis charting. The zone of support is seen as a lower boundary which the stock has not broken through in previous trading sessions. At the support level, supply outweighs demand and volume is usually low.
BREAKING DOWN ‘Zone of Support’
The zone of support is generally known as a boundary zone representing security price lows that the security has not easily moved through in previous trading sessions. The zone of support typically occurs around a support trendline. While it can at times be shown as a finite point on a technical chart, continuous trading of a security keeps the support trendline’s price non-static.
Zone of support areas can be very profitable areas for traders. Similar to zones of resistance, these areas present opportunity for a reversal. As such, traders can use a variety of different technical analysis patterns to identify these zones for profitable trades.
Envelope channels are a popular charting technique that allow a trader to draw continuous resistance and support boundaries around a security’s moving price. A Bollinger Band chart is one of the most common envelope channels used by traders. This pattern draws resistance and support trendlines two standard deviations above and below a security price’s moving average. Other popular envelope channels incorporating resistance and support boundaries include Keltner Channels and Donchian Channels.
Traders can also use shorter term trendlines to draw tighter channels at a security’s peak and trough levels. These channels are known as ascending, descending or sideways channels. They also provide a trader with a defined support boundary that can be used as a zone of support.
Support Zone Parameters
Generally, support zone areas can be vague. They are represented by the area around a charted support trendline but the price action in this area can be volatile. Market pricing mechanisms and the use of similar charting techniques by traders across the industry can make trading in the support zone choppy.
To clearly identify trading indicators in the support zone there a few defined systems traders can use. One is Fibonacci Retracement. This methodology is built around ascending, descending and sideways channels. It draws parameters by percentages from 0% at the support boundary to 100% at the resistance boundary. Intermediary lines drawn through the charting pattern are available to help a trader better identify zones for trading.
Advanced technical analysis charting software can also help a trader to draw support zones on a technical analysis candlestick chart. These software programs typically include resistance and support zones with varying color schemes to represent the strength of the support signals. Traders can usually customize the parameters for support in the charting software based on their preferences.
Traders will typically watch support zone activity closely as it can be profitable for identifying a reversal or further downtrend. If a trader believes that a security’s price will rebound from the support zone, then the support zone can be a good area to buy in order to benefit from price increases. If the trader finds that the price seems likely to further continue its downtrend then selling or short selling positions would be the most profitable.