Supports and resistances in trading

What is a support?

Support is a level that supports the price and provides crucial information to traders and investors.

Let’s imagine that bitcoin ‘s trend is pointing downwards. At this point, supports become some of the things to watch very carefully for several reasons.

Generally speaking, these levels represent the first concrete barrier to the ongoing decline.

A rebound on a support is a positive signal and reinforces its authority: if we should return to that level in the future, traders and investors will be more confident about its holding.

Conversely, when a support gives way, it is never a good signal.

In addition, most of the stop loss set by those in the market are placed around these levels. Breaking through a support to the downside could trigger these automatisms and cause a deep red ripple effect.

A support is not set at the desk but must find some significance in the past. Usually we are dealing with an old resistance turned into support.

So far we have described what are fixed support level. However, there are also other types, among which dynamic ones stand out.

Moving averages act as both support and resistance and are probably the most famous dynamic support levels in trading.

Basing their construction on market trends over specific timeframes, moving averages change continuously. They therefore generate moving support and resistance levels, which are useful for getting as complete a picture of the situation as possible.

"Support: key level supporting price"

What is a resistance?

At the opposite end of the spectrum from support we find resistance, a level that acts as an obstacle to the rise in price.

The breaking of a resistance is obviously a positive signal: a barrier has been broken and the ascent can continue.

Conversely, the holding of resistance could signal the start of a bearish phase (if combined with other signals), corrective or pause.

As mentioned earlier, a broken resistance becomes a support; clearly, a breached support also mutates into resistance. This sort of dance is continuous and absolutely natural: what supports today may become an obstacle tomorrow and vice versa; it all depends on the market.

Breakout is the technical term we use to call the breaking through of a resistance or support.

"Resistance: a level that acts as an obstacle to the rise in price"

The importance of supports and resistances

Trading supports and resistances are key elements when analysing the performance of a cryptocurrency, stock, commodity or other asset.

They are easy to follow and understand, impossible to misinterpret. By setting up a certain trade, at the start we will already know which price thresholds to keep an eye on, when to insert the stop loss and perhaps even a take profit.

In the image below, two key levels taken from Apple’s chart from a while ago. We note how on more than one occasion they have acted as a barrier or support. We also pay attention to how the market has retraced its steps several times after breaking to the downside or upside – all completely normal.

Woe betide ignoring supports and resistances: they are part of the trader’s abc.

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Identifying supports and resistances

It might sound difficult but it’s not: supports and resistances in trading can be spotted relatively easily.

Here are some simple steps to follow:

• We open the chart of the asset we are interested in.
• We start by analysing the trend over the past few years. We will notice levels where the price has stopped its upward or downward movement: these are resistances and supports.
• At this point, let us reason about their importance. A support that has been touched several times is definitely stronger than an almost random one, which has only intervened on one occasion. The same applies to resistances.
• We are now in possession of key supports and resistances in the medium and long term. Should we wish to operate on shorter time frames, we repeat the procedure by narrowing the time frame shown on the chart. We will notice new key levels appear, negligible in the medium and long term but significant in the short term.

What has just been written is the minimum necessary to identify supports and resistances.

There are also other aspects to be taken into consideration; for example, round or symbolic figures always have a certain importance even if they do not have a significant history. This is because the market is made up of people, many of whom give way to their emotions. To cite a case in point, bitcoin at $100,000 would represent an emotionally relevant level; should we one day approach that figure, rest assured that it will act as an unprecedented resistance.

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