Support and resistance are two of the most talked about in technical analysis.
It is part of the analysis of chart patterns. Used by traders to indicate that the price on the chart tends to act as a barrier. Prevent the price of an asset from being pushed in a certain direction.
Definitions and ideas with identification seem easy. But when you find out, you see the difference. It can appear in many different forms. Its concept is broader and harder than you might think.
What is support?
Support or called floor stand The lowest point on the chart at which, when the price moves to that level, the market corrects and rises again.
Basically, this is like a spring mattress when you jump up, you will bounce like that.
What is resistance?
Resist or called Resistance is the highest point on the chart that when the price moves to that level, the market will correct and decline again.
Above for you to understand simply support and resistance. These terms are referred to by technical analysts as barriers. Play a role in preventing a type of property from being pushed in a certain direction.
For traders or longtime investors, it is a familiar concept. But for those new 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 clarify these:
- When the market goes up and corrects back down. The highest point it can achieve before correcting is the resistance (resistance).
- When the market bounced back. The lowest point it reaches before rising again will become support.
- And when the market is volatile, continuous support and resistance levels are created.
Above is the Bitcoin chart. Support level holds the price of BTC, prevent it from going down. This level is formed by the strong buying pressure in that area. Support can be considered as a point in which prices can only break through strong selling pressure.
As for resistance, for example, for a long time, you realized that the price of Bitcoin could not surpass the $ 12000 mark. Then you determine that the price near $ 12000 is the resistance.
You look at the price of Bitcoin in the following image. Caused by a large supply of sellers in that price area. Understandably, resistance is a level that can only be overcome with strong buying pressure.
How to draw support and resistance
To draw great and accurate resistance and support. It's important to remember that resistance and support are not an exact number. To be able to better identify what you think you should draw on the line chart, this helps you practice your skills a lot.
For resistance you need to rely on the previous highs. It may be a horizontal line but sometimes it will be diagonal or a trend line.
When drawing areas or resistance lines, you should consider at least two previous highs (more is better). The more you use it, the more reliable and accurate it is in your technical analysis.
Drawing support (Support)
As for the support level. The drawing method is the same as the resistance drawing. You rely on the previous low prices. It is also a horizontal line and sometimes a trend line.
When drawing lines or support zones, you should consider the previous two lows (more is better). It is just like resisting right, not just the opposite. The more points you use, the more accurate and reliable it will be.
When resistance or support is broken, it can reverse roles and positions for each other. This is a good opportunity for trading and investing. You should draw on a large time frame and incorporate many technical indicators. It will help you become more proficient in chart analysis.
As in the previous sections, you see the constant levels act as a barrier preventing prices from going up or down.
In general, an asset always tends. Resistance and support levels change over time. This concept refers to the importance of a trendline or trendline.
A trend line is a line drawn on 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 price direction and speed.
Another feature of support or resistance is that the price of an asset may have difficulty exceeding the number of rounds. For example, $ 60 for LTC.
Most inexperienced traders tend to buy or sell assets when prices scale the whole. That's because they feel that an asset is well priced at that level.
Investors place orders at the round price instead of at the price like $ 60,06. Because many orders are placed at the same level, these round figures tend to act as strong price barriers.
If all investors place a sell order with the proposed target of $ 60, then a very large amount of buying will be needed to absorb these sales and thus, a level of resistance will be created.
Most technical traders combine the power of different technical indicators. Such as moving averages, to support future short-term movement predictions.
But there are some traders who never recognize 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 constantly changing line. Note the price of the asset finding support at the moving averages when the trend is up. And of course the way it behaves as resistance when the trend is down.
Important when identifying support and resistance
Although the detection of support and resistance levels on the chart is relatively simple. Some investors remove them completely. Because these levels are based on previous price dynamics. Do not provide true information about what will happen in the near future.
Identifying future support can significantly improve the profitability of short-term investment strategies. Gives traders an accurate picture of what price will drive the asset's price in the event of an adjustment.
On the contrary, foreseeing a resistance level may be advantageous by. This is the price likely to harm a long position. As mentioned above, there are a number of different methods to choose from when seeking to identify support and resistance.
But regardless of the method, the explanation is the same. It prevents the price of a underlying asset from moving in a certain direction.
The price chart allows investors to visually identify support and resistance areas. Help them relate to the importance of these prices. More specifically, they observe the following:
The number of touches support and resistance
The more times the price touches a test of support or resistance. Accuracy is becoming more important. When prices continue to break out of support or resistance. Many buyers and sellers will pay attention and will make trading decisions based on these levels.
Volume traded at a certain price
The more you buy and sell at a specific price, the stronger the support or resistance level. This is because traders and investors keep in mind these prices and can reuse them.
When strong activity occurs with large volume and price drops, a lot of transactions are likely to happen once the price gets back to that level. People will find it much safer to end a trade at breakeven instead of losing money.
Support and resistance areas become even more important. That is if those levels have been checked regularly for a long time. Please wait patiently.
Trade effectively with support and resistance
To make good use of the support and resistance levels you need to have an effective trading strategy or method. You can refer to the following outstanding strategies:
Use trends as support or resistance. Draw a line connecting two or more highs in a downtrend. Or two or more lower levels in an uptrend.
In a strong trend, prices will bounce off the trend line and continue moving in the direction of that trend. Therefore, traders should only look for items in the direction of the trend for higher probability transactions.
Scope of transactions
Transaction range takes place in the space between support and resistance as traders aim to buy at support and sell at resistance.
Think of the area between support and resistance as a room. The range tends to appear in sideways trading markets, where there is no clear sign of the trend.
Support and resistance levels are not always perfect. Sometimes the price will bounce off a specific area, instead of a perfect straight line.
It is necessary to define a trading range and therefore, areas of support and resistance should be identified. It will make it more effective and diversified in trading strategies.
Breakthrough trading method
People often call it the pullback name. It is often the case after a period of uncertainty that the price will break and start a new trend.
Traders often seek such a breakout below support or above resistance to take advantage of further upward momentum in one direction. If the momentum is strong enough, it has the potential to start a new trend.
However, in an attempt to avoid falling into a false breakout trade trap, top traders tend to wait for a break. regressive (towards support or resistance) before making a trade.
For example, in the image below you see a strong support level before the sellers push the price below the support level. Many traders may be in a hurry to book short term trades early.
Instead, traders should wait for a response in the market to break before making a short trade.
Traders should wait for the market to continue moving down, before seeking entry.
You also noticed right. Determining future levels of support can significantly improve return on investment. Because it gives traders an accurate picture of what price will drive the price of certain asset types in the event of a correction.
As mentioned above, there are a number of different methods to choose from when seeking to identify support and resistance. But regardless of the method, the explanation is 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 multiple methods together before applying for technical analysis. Good luck.