Post of the Day: Testing Support

[B]Student’s Question:[/B][B][/B]

Price tested support and support held. What does that mean? Thanks.

[B]Power Course Instructor’s Response:[/B][B][/B]

Take a look at the chart below…

You will see that a support level is noted. Within the green box, there are six complete candles. Five of those six candles traded down to the labeled support level but did not close below it. In one case we can see that price traded below it as is evidenced by the wick below, but it did not [I]close[/I] below support and that is the key. In each of these tests of support, since price respected that level by not closing below it, we would say that support held.

Based on that information, we know that this is a fairly strong level of support. We could use that in our trading in a couple of ways…

  1. Once we have identified the support level, a long position could be taken with a stop placed just beneath the lowest level that price has traded below that level.  In this case it would be the bottom of the wick.
  2. Once we see a bullish candle or candle pattern appear, there is a strong potential that the pair will now begin a move to the upside.  In this case, it is the “bullish engulfing” candle that is the last one on the right in the green box.