Simply defined, a support region is where an asset’s price tends to stop falling, while a resistance area is where the price tends to stop rising. However, traders must more information regarding support and resistance than those simple definitions.
Surprisingly, everyone appears to have a different perspective on how support and resistance should be measured. Let’s start with the basics. Take a look at the graphic below. This zigzag pattern is heading upward, as you can see. When the price soars up and then pulls back, the highest point hit before the price dropped back is now resistance
Where there is a glut of sellers, resistance levels imply. When the price starts to rise again, the lowest position before it starts to rise again will act as support. Support levels imply the presence of a surplus of buyers. As the price swings up and down over time, resistance and support are generated in this manner. In a downturn, the opposite is true.
Plotting Support and Resistance Levels
It’s wise to note that support and resistance levels are approximate. Often, you’ll see a such levels that appears to have been broken, only to find out that the market was only testing it.
On candlestick charts, the candlestick shadows are typically used to indicate these “tests” of support and resistance. Take note of the Bitcoin chart, how the candle shadows tested the $28,700 support level. The price appeared to be “breaking” support at the time. In retrospect, we can see that the price was simply attempting to reach that level for quite a sometime after the final break below.
Traders aim to buy at support and sell at resistance in range trading, which takes place in the zone between support and resistance. Think of the area between resistance and support as a room. The support comes from the floor, while the resistance comes from the ceiling.
These levels aren’t usually straight lines. Instead of a completely straight line, price will sometimes bounce off a certain region. Traders must establish a trading range and, as a result, must establish zones of support and resistance. The zone of such levels may be seen in the graph above. Traders seek for long entries when price bounces off support and short entries when price bounces off resistance when the market is range-bound.
Breakout strategy (Pullback)
Traders frequently watch for the breaks below support or over resistance in order to profit from the trend’s continuing upward momentum. Patient traders, on the other hand, tend to wait for a pullback before committing to a trade in order to avoid falling into the trap of trading the false breakout.
The BTC/USDT chart, for example, indicates a solid level of support before sellers drove the price below it. Many traders may become hooked and rush to initiate a short trade too soon. Instead of executing a short trade, traders should wait for the market response (buyers seeking to gain control) to break down. Before seeking for entry chances in the above situation, traders should wait for the market to continue heading down following the retreat.
Moving Averages(MA) as a Support and Resistance
We talked about the Moving Average in detail in our previous article of the educational series. Let’s talk in terms of support and resistance. Moving averages can act as dynamic support/resistance in the market. The 100 and 200 period moving averages are popular moving averages to use.
The 100 MA first tracks above the market as a line of resistance, as shown in the chart above. The market then bottoms and reverses, with the 100 MA acting as a dynamic support level. Traders frequently combine the 100 and 200 MAs as well as horizontal levels. it is up to the trader to choose a setup that they are comfortable with.
One must be dynamic in the trading decisions based on them because Support/Resistance are dynamic. Its analysis is a significant trading pillar, and most systems include some form of it. Traders must use solid risk management to limit losses since no system is perfectly accurate.
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Images courtesy of TradingView.
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