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Understanding Support and Resistance Levels

October 20, 2021

4m

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Pockets of liquidity indicate that certain price levels possess the qualities of acting as support or resistance, depending on the amount of buy or sell orders that they have. As such, support and resistance are elemental levels that every TA neophyte must understand before venturing into the crypto market.

Identifying support and resistance levels allows traders to predict future price action by being aware of barriers that emit pressure from the opposite direction. These levels can be detected by either examining order books or historical charts.

In the first case, an order book reveals at which price levels liquidity is located. If Bitcoin has $2.4 million worth of sell orders at $35,000 we can expect it to break harder than if the level had only $100,000 in selling liquidity. Using heatmaps is advisable for this method, as they provide a visual representation of order book liquidity.

In the second case, we can chart a longer time period to detect price levels at which the market accepts or rejects prices. If Bitcoin bounced numerous times at $30,000 we can expect it to act as support in the future as well. Likewise, $60,000 can act as heavy resistance if Bitcoin cannot go past it.

With the help of the aforementioned examples, we already have a good understanding of what support and resistance levels are.

Support is a price level at which the price of an asset bounces after a downtrend. Generally, this is an area where demand forms and market participants place their buying liquidity.

Resistance is a price level at which the price is rejected after an uptrend. This is seen as a zone of supply, as market participants are interested in selling their assets at those levels.

Supports and resistances assist traders by guiding them where to buy or sell. After either type of liquidity level is identified, we can plan our entries or exits - similarly to how we would trade the highs and lows of a channel.

So if we know that the market rejected an asset at a certain price more than a few times, we can add sell orders at that level. If history repeats itself, we can profit by selling at the highest point possible. Likewise, we can conduct the exact same process by buying at support levels and selling once resistance is again reached.

Be advised that both resistance and support levels can be broken at any time. If a support is broken, prices will plunge until the next support level is reached. If a resistance is broken, prices will rise until the next resistance is reached. The likelihood of a breakout depends on the amount of liquidity and buying/selling pressure at the time.

In general, the strength of a support or resistance level depends on the timeframe it is located in. Levels that are respected on HTFs are stronger compared to levels situated at LTFs. For example, a weekly resistance level is much stronger and will take more liquidity to ‘take out’ compared to a daily resistance.

The easiest way to spot support and resistance is by setting horizontal trendlines. These are static price levels that never move up or down. In the example below, we see that Bitcoin held $42,000 for quite a while and always bounced from that support level. In the next example, we similarly see $58,000 acting as resistance over a long period of time.

There are also examples where support and resistance are not constant. An ascending trendline (as shown in the image below) shows that the support level rises and that the price never drops below it. Although the trendline may have started at $24,000 the support moved gradually to $30,000 and still holds its level.

Support and Resistance on Different Indicators

Trendlines are faithful enough when it comes to support and resistance, but traders can also encounter these levels when dealing with various TA indicators. Resistance and support can be found on basically any indicator where price (or a piece of data) moves between two points.

In RSI, 30 and 70 respectively act as support and resistance.

With Fibonacci levels, traders can draw out levels of potential support and resistance.

With Ichimoku clouds, both the clouds and lines (Kijun, tenkan, etc.) act as support/resistance.

With Moving Averages (MAs), lines generally act as resistance in a downwards trend and support in an upwards trend.

The list of environments where these price levels can be spotted is endless. Due to the effects of market psychology, nearly any type of data can serve as support or resistance in TA.

More Lessons in

Crypto Investing Guide: Technical Analysis