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What is support and resistance? The most effective way to identify and trade

support and resistance

Support and resistance are two of the most exchanged terms in technical analysis.

It is part of the analysis of chart patterns. Used by traders to refer to a price level on a chart that tends to act as a barrier. Prevents the price of an asset from being pushed in a certain direction.

Definitions and ideas with identification seem easy. But when you learn, you will see something different. It can appear in many different forms. Its concept is much broader and more difficult than you think.

What is support?

Support aka support is the lowest point on the chart where when price moves to that level, the market corrects and rises again.

In a word, this is like a spring pad when you jump up, you will bounce like that.

What is resistance?

Resist aka Resistance is the highest point on the chart where when price moves to that level, the market corrects and falls again.

Basic support and resistance

The above for you to understand simply support and resistance. These terms are referred to by technical analysts as barriers. Has the role of preventing an asset class from being pushed in a certain direction.

For longtime traders or investors, it's a familiar concept. But for new entrants to the market are very important concepts. Much discussed in technical analysis.

How to identify support and resistance

To identify support and resistance, you need to make these things clear:

  • When the market goes up and corrects down again. The highest point it reaches before the downward correction is resistance.
  • When the market goes up again. The lowest point it reaches before rising again becomes support.
  • And when the market is volatile, support and resistance levels are constantly being created.

support level support

Above is the Bitcoin chart .Holding support of BTC, prevent it from going down. This level was formed because the buying pressure in that area was very strong. Support can be thought of as points where the price can only be broken with strong selling pressure.

As for resistance, for example, over a long period of time you find that the price of Bitcoin cannot break through the $12000 mark. Then you determine that the price near $12000 is resistance.

You see the price of Bitcoin in the following figure. Caused by a large supply of sellers in that price area. A level of resistance can be understood as a level that can only be overcome with strong buying pressure.

resistance level resistance

How to draw support and resistance

To draw well and accurately support and resistance. It is important to remember that resistance and support are not exact numbers. To be able to identify better I think you should draw on a line chart, this helps you practice a lot.

Draw Resistance (Resistance)

For resistance you need to rely on the previous high. It can be a horizontal line but sometimes it will be a diagonal line aka a trend line.

When drawing resistance zones or lines, you should consider at least two previous highs (more is better). The more you use it, the more reliable and accurate it becomes in your technical analysis.

Draw support (Support)

As for the support level. The drawing method is similar to drawing resistance. You rely on previous lows. It is also a horizontal line and sometimes a trend line.

When drawing support lines or areas, you should consider the previous two lows (more is better). Just like true resistance not just the opposite. The more points you use, the higher the accuracy and reliability.

When resistance or support is broken it can reverse roles and positions. This is a good opportunity for trading and investment. You should draw on large timeframes and combine multiple technical indicators. It will help you to become more proficient in chart analysis.

Trend line

As you can see in the previous sections, the constant levels act as a barrier to the price going up or down.

In general, an asset is always trending. Resistance and support levels change over time. This concept refers to the importance of trend lines or trendlines.

trendline trendline

A trend line is a line drawn above the highs. Or below the low to show the direction of the price. Trend lines are representative of support and resistance in any timeframe. Shows us the direction and speed of the price.

Round number

Another feature of support and resistance is that the price of an asset can have trouble breaking out of round numbers. For example, $60 for LTC.

Most inexperienced traders tend to buy or sell assets when the price is full scale. That's because they feel that an asset class is priced well at that level.

Traders place orders at a round price instead of at a price like $60,06. Because so many orders are placed at the same level, these round numbers tend to act as strong price barriers.

If all traders place sell orders with the suggested target of $60, a tremendous amount of buying will be needed to absorb these sales and thus a level of resistance will be created.

Moving Average

Most technical traders combine the strength of different technical indicators. Such as moving averages, to assist in predicting future short-term movement.

But there are some traders who never realize it. The ability of these tools to identify support and resistance levels.

As you can see from the chart below, the moving average is a continuously changing line. Notice the price of the asset finds support at the moving averages when the trend is up. And of course how it acts as resistance when the trend is down.

moving average

Important when identifying support and resistance

Although spotting support and resistance levels on a chart is relatively straightforward. Some investors dismiss them altogether. As these levels are based on previous price moves. Does not provide real information about what will happen in the future.

Identifying future support can significantly improve the returns of a short-term investment strategy. Gives traders an accurate picture of which price levels will drive the asset's price in the event of a correction.

Conversely, foreseeing a resistance level can be advantageous by. This is the price level that is likely to harm a long position. As mentioned above, there are a number of different methods to choose from when looking to identify support and resistance.

But regardless of the method, the interpretation remains the same. It prevents the price of an underlying asset from moving in a certain direction.

Related Indicators

Price charts allow investors to visually identify areas of support and resistance. Help them make a connection to the importance of these prices. More specifically, they observed the following factors:

Support and resistance touches

The more times the price hits a support or resistance area. Accuracy becomes even more important. When price continues to bounce off support or resistance levels. Many buyers and sellers will notice and will make trading decisions based on these levels.

Trading volume at a certain price

The more buying and selling at a particular price, the stronger the support or resistance level. This is because traders and investors remember these prices and can reuse them.

When there is strong activity on high volume and the price drops, a lot of trades are likely to occur when the price returns to that level. People will find it a lot safer to end up at breakeven rather than at a loss.

Time

Support and resistance areas become even more important. That is if those levels have been tested regularly over a long period of time. You wait patiently.

Trade effectively with support and resistance

To make good use of support and resistance levels you need to have an effective trading strategy or method. You can refer to some outstanding strategies below:

Trend

Use trends as support or resistance. Draw a line connecting two or more highs in a downtrend. Or two or more lower lows in an uptrend.

In a strong trend, the price will bounce off the trendline and continue moving in the direction of that trend. Therefore, traders should only look for entries in the direction of the trend for higher probability trades.

Trading range

Trading range occurs in the space between support and resistance as traders aim to buy at support and sell at resistance.

You try to think of the area between support and resistance as a room. Ranges tend to appear in sideways trading markets where there is no clear indication of a trend.

Support and resistance levels are not always perfect. Sometimes the price will bounce off a specific area, instead of a perfectly straight line.

It is necessary to define a trading range and, therefore, to identify areas of support and resistance. It will make the trading strategy more efficient and diversified.

Breakthrough trading method

People call it pullback. It is often the case that after a period of directional uncertainty, the price will break out and start a new trend.

Traders often look for such a breakout below support or above resistance to capitalize on further upward momentum in one direction. If this momentum is strong enough, it has the potential to start a new trend.

However, in an effort to avoid falling into the false breakout trading trap, top traders tend to wait for a breakout. regressive (towards support or resistance) before taking a trade.

For example, in the image below you see strong support before sellers pushed the price below support. Many traders may be in a hurry to place short-term trades early.

Instead, traders should wait for a response in the market for a breakout before taking a short trade.

Corrective support and resistance

Traders should wait for the market to continue moving down, before looking for an entry point.

Summary

You also noticed that right. Identifying future support levels can significantly improve investment returns. Because it gives traders an accurate picture of what price will drive the price of certain asset class in the event of a correction.

As mentioned above, there are a number of different methods to choose from when looking to identify support and resistance. But regardless of the method, the interpretation remains the same, it prevents the price of an underlying asset from moving in a certain direction.

You should clarify the two concepts of support and resistance. At the same time, apply many methods in combination before applying for technical analysis. Good luck.

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