If you are at all interested in trading, be it in crypto-currencies, stock indices or even currencies, you have certainly already heard/read a sentence like this:
“If it goes over $20,000, I’ll be buying!” or “the price of this coin shouldn’t go below $1.10”.
Well this concept ladies and gentlemen, is what we call in the simplest terms in the world of trading—Support and Resistance.
Disclaimer: Our content is intended to be used and must be used for informational purposes only. It is very important to do your own research and analysis before making any investment based on your personal circumstances.
What are supports and resistances?
So we’re going to start with some simple examples and we’ll go deeper into the concept as the article progresses. To keep things simple, we will use the analogy of a house with a room, a cellar underneath and the attic above the room.
Prices move by bouncing between the “floor”, which will then correspond to support, and the “ceiling” which will then correspond to a resistance zone.
A support is therefore a level on which prices bounce upwards while a resistance is a level that prevents prices from rising higher.
Strength of support and resistance
As you can see, these are levels that stop the fall or prevent the rise. Okay, but until when? Indeed, support and resistance do not hold forever and prices will eventually go beyond this barrier level.
As a general rule, the more a support/resistance level is hit, the weaker it becomes and the more likely it is to be broken.
As we can see on the chart above, the resistance level was hit twice before it broke. For the support, it was touched 3 times before finally breaking.
Can we use them to trade?
Absolutely and the support and resistance levels are even the basis for what is called “price action”, a technical analysis method that is not based on any indicator.
Let’s go back to our chart, once the support has been broken, we can observe that the prices have come back to test this same level. Indeed, when a support is broken, it becomes a resistance. Opening a short position on a retest like this is a very common strategy in trading!
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How to recognize them?
The easiest way is still to draw a line between two high points (for resistance) as we see on the chart above. In practice, some traders use support and resistance zones rather than a fixed line, which is then called a liquidity zone (supply and demand).
To recognize them, there are tools available on Tradingview called “market profile”. This tool visually represents the price zone with the most traded volume, in other words the most liquid price zone.
As usual, don’t rely on one approach when it comes to trading. Multiply the sources of information and always do your own research!
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