3.14 Support and resistance levels

You might have already noticed that support and resistance levels are the most commonly used terms in the context of technical analysis in trading. Understanding and identifying support and resistance levels is one of the key aspects of performing technical analysis.

Imagine a ball bouncing around in your house. It's not hard to see that there are two barriers that limit its movement - the ceiling and the floor. In trading, there are similar barriers that limit asset price movements. They are known as "support and resistance levels."

This lesson explains support and resistance levels and how to find them in the market.

Content:

• What are support and resistance levels?

• How to find support and resistance levels in the market?
   

What are support and resistance levels?

Support is the level of the price of an asset at which a downward trend can be expected to stop. The support level occurs as a result of a concentration of demand or buying interest.

The support level is below the current price of the asset, and it is usually at this level that the price finds support. This means that the price is more likely to rebound than to collapse. When the price of a crypto asset falls, demand for that currency increases, so a support zone is formed. The support level represents the "floor" in the analogy of a ball bouncing in a room.

The resistance level, on the other hand, occurs when there is increasing selling interest when the asset is in an uptrend

The resistance level is above the current price of the asset and plays a similar role to the upper limit of the rising price. When the price of an asset rises, investors' interest in more profit increases. When selling concentration increases, a resistance level is formed and the price is likely to fall. A resistance level becomes a resistance zone when more than one resistance level occurs at roughly the same price.

Wondering what happens if the price of an asset crosses a support or resistance level? Well, these barriers eventually break through.

When a support or resistance level is broken, the price usually moves to the next support or resistance level. In addition, the broken resistance level becomes new support, and the broken support level becomes new resistance. This phenomenon is known as the "principle of polarity reversal".

 

Support and resistance levels are key tools of technical analysis, as they provide trading opportunities. For example: a support level serves you as an entry point into the market, and a resistance level acts as an exit point.
 

How do you find support and resistance levels in the market?

There are many methods and tools to help you identify support and resistance levels. Let's take a look at a few of them.

• Previous upper and lower pivot points

• Candlestick formations

• Moving averages

• Trend lines

• Fibonacci elimination levels

We have already discussed some of the methods mentioned, such as candlestick formations and Fibonacci elimination levels. Others will be discussed in the following lessons. Now let's focus on a few examples from the list above and try to understand how to find support and resistance levels by looking at the charts below.

The first chart illustrates a market with a trend line. The trend line acts as support and prevents the market from breaking through it.

 

The chart below shows the use of the Simple Moving Average (SMA) in another crypto market. As you can see, the SMA acts as a resistance level and when it breaks through, it begins to act as support.

 

The chart below is an example of the LSK-PLN pair, where the highest peak acted as resistance. The market reached this level, but there were no candles close to it.

 

Searching for support and resistance requires identifying significant levels that together form a trend (or range) and are more important than other price levels. There are a number of guidelines and rules that determine the validity and importance of a level as support or resistance. Let's take a look at some of them here.

• Testing at multiple levels: If a certain price level has been "tested" (traded at that price) many times, traders may consider it to be solid material. Traders may be reluctant to place sell orders below local lows because these levels have not been reached in the past.

• Position size: Focusing on the above, if a large transaction is made near an important price level, it will usually attract attention and be noticed by market participants.

• Deals made: the more recent the investments made, the more important it is to analyze price levels.

• Rounded numbers: This is more psychology than anything else - traders (and the general public) tend to remember rounded numbers - approximately.

By identifying support and resistance levels, you can access strong areas of supply and demand in the market, so you can make better decisions.

In the next lesson we will learn more about charts and how to read them