The Fundamentals of Support and Resistance

Technical analysis is based on support and resistance levels, which can be used in the stock market, forex, futures, and other financial trading markets. Investors can judge current trends and predict future price movements by analyzing support and resistance levels.

Based on historical market trends, support, and resistance levels forecast future price movements. Usually, support levels rebound, and resistance levels fall. However, if the price breaks the support or resistance, it may indicate a clear direction for short-term gains or losses.

What are support and resistance?

Support level

The support level is the point in a down market where the price stops falling further and even begins bouncing due to the market’s buying power, which can be understood as the support level.

Take the 4-hour K-line chart of ETH/USDT on the Gate.io platform as an example. After a period of continuous decline, the price stops falling at support level A and bounces back to start an uptrend.

Resistance level

The resistance level is when the market price rises to a certain level near the impact of market selling forces, and the price stops growing or even begins to fall, as shown in the above chart at the B resistance level after a period of time known as a retracement or price consolidation.

How to find support and resistance levels

Although everyone approaches finding support and resistance levels differently, they are all based on one feature: the highest (or highest area) and lowest (or lowest area) of the pass as the reference point for subsequent quotes, respectively.

I. How to find a support level

The first fundamental case: The vertical line

As shown in the chart below: In a downtrend, the price begins to rally when it reaches low point A, then falls again, and when it comes to the previous low price near point B, it stops the downtrend and begins to rally again, and the two lows are connected into a vertical line called the support line. In some ways, the support line can help to keep the price from falling.

Trend formation process: When the price reaches a relatively low point, institutions and large funds see the value, so they intervene in the buy order or long single. When the price falls again near this position, if the institutions and big money are still optimistic about the price of this position, they will be out to maintain their long single, resulting in the formation of a support line.

Take the ETH/USDT of the Gate.io platform as an example; the price of ETH reached 1072 USDT (point C) on November 10, and after a rebound, ETH fell back to 1075 USDT (point A) again on November 22. At this time, the prices of point A and point C are similar, and a line connected to AC is the support line. When the price comes close to the support line again, you can place Buy orders.

Second fundamental case: Upward trend line

When the market is trending upward, as shown in the chart below, connect the two lows A and B, to form a trend line, also known as a support line. When the price falls to this line for the third time and does not fall below it, the market will most likely resume its upward trend.

Take the Gate.io platform BTC/USDT as an example; in an uptrend, a straight line is extended, connecting the two lows A and B. When the price touches the line for the third time (at C), a bullish combination K-line signal appears, and the uptrend continues. Therefore, the rising line formed by AB is a support line.

II. How to find a resistance level

The resistance and support levels are opposed. As shown in the figure, the resistance line is formed by connecting two highs and is further subdivided into the basic horizontal resistance line and the downtrend resistance line.

III. Support and resistance in technical indicators

In addition to the methods described above, investors frequently employ other technical indicators, such as Bollinger Bands, to determine support and resistance.

If you are unfamiliar with Bollinger bands, you should first learn what the Bollinger band indicator is. The middle and lower Bollinger Bands act as support when the price moves between the upper and middle Bollinger Bands. The middle and upper Bollinger Bands act as resistance when the price moves between the lower and middle Bollinger Bands.

Similarly, the Exponential Moving Average (EMA) can form support and resistance, which can be seen as support when the price is above the average and resistance when the price is below the average.

IV. Special round number point

Certain numbers in the cryptocurrency market also attract investors. For example, between June and July, ETH formed support several times when it reached near the round number price of 1,000 USDT on the Gate platform and then began a nice rally, as shown in the chart.

Similarly, when the ETH price bounces from 1000 USDT to around 2000 USDT, longs are already taking profits, and the price meets a round number, then forms resistance to fall back.

However, just because the large funds were willing to buy and sell at a certain round number does not necessarily mean that the large funds will buy and sell at the same position in the future. After all, the market is constantly changing over time, so the special round number as support and resistance is not static.

Transformation of support and resistance levels

Support and resistance lines are frequently exchangeable.

When the price breaches resistance, the resistance line becomes the support for the next price; similarly, when the price breaches sustain, the support line becomes resistance for the next price.

Support to Resistance

As shown in the chart below, when the support at point A is broken, new support is obtained at point C, and the rally starts from C, then the price at the previous point A becomes resistance.

Resistance to Support

As shown in the chart below, when the price breaks above the previous high point A, the price at the previous point A is transformed into support during the retracement.

Trading Strategies for Support and Resistance Levels

The basic support and resistance trading strategy is to buy when the price falls near the support line and sell when the price rises near the resistance line.

However, the support and resistance levels could be more precise numbers. It is common to see a support or resistance level appear broken but quickly recover, indicating that the market is testing for support or resistance.

As shown in the chart, the price of Bitcoin at point C has fallen below the previous support at points A and B but has since rallied back above that line. If you sell BTC when it drops below A or B, you will be “tricked” by the market’s probing and miss a rally.

As a result, the support or resistance level should be divided into a high-to-low or low-to-high price range rather than a specific number, as shown in the figure below, to avoid losses caused by false breakouts.

Conclusion

Support level refers to a particular price level or above, where the buyers’ force is more robust, and the price may stop falling or rally up. The resistance level is the opposite, where the sellers’ force is more powerful, and the price may stop rising and then fall.

Now that you understand what support and resistance are, you should know that technical indicators can form them in addition to horizontal and diagonal lines created by connecting relatively low price points. Support and resistance can be defined in various ways, and technical indicators such as Bollinger bands, averages, K-line combinations, and so on can be used to assess them.

Generally, support and resistance levels are essential reference points for investors during trading. However, not all support levels are appropriate for purchasing, and not all pressure levels are suitable for selling. In practice, they should be used with the current K-line, market sentiment, and other indicators to provide a complete picture before making a trading decision.