Example of using support levels
Let’s assume you’re following ABC’s share price to try and identify when the best time would be to enter a long position. Over the past six months, ABC has traded between £13.00 and £18.00 a share.
As you keep watching the stock, you realise that the price climbs from £13.00 to £15.00, then drops to £13.00 again. It gains momentum and rises to £17.00 but drops to £13.00 once again. Every time the share price rises, it goes beyond the previous high, but when it drops, it never drops below £13.00.
You’ve now established that the support level is around £13.00, so you decide to buy ABC when it reaches £13.50, in the hopes that the price will go up soon.
Remember that the price is not guaranteed to increase. Therefore, it is important to conduct further technical analysis and fundamental analysis and not rely solely on support levels.