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Q&A: Technical Analysis and Trading Terms: What's a "bounce"?

Question

What's a "bounce"?

In a recent post you write "I will be taking a little profit off the table given the large move in a short period of time to potentially take advantage of a bounce off of potential support levels. Translation: now is not the best time to pile on additional short exposure unless and only if you are building a longer-term short position (which I do recommend)."

Is a "bounce" an artificial increase in price primarily due to traders' reaction to a swift decline and not tied to an increase in value? Is a "support level" some threshold of value?

Thank you for your time.

Answer

Correct on the first half of your assumption. A "bounce" is more of a reactive move to a larger decline that is indicative of a pause in direction rather than a longer-term reverse of that direction.

Support level = a trading term meaning a temporary price level that might be a stopping point for a decline or a beginning point for a bounce. Or, in some cases, it is a longer-term price level that is supported by a long-term trend and may be harder to cut through. When the direction of a stock/currency pair is down, it is called "support". When the direction of the stock/currency pair is up, it is called "resistance". Same concept as support but from an opposite perspective.


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bounce, Forex, support level, technical analysis

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