Support and resistance levels — the elementary basis of technical analysis. They have a number of properties, which help traders to identify the trend, also, entry and exit points of the market.
Important point # 1: the levels cannot “predict”
It’s impossible to predict which level will be broken, it’s important to focus on the fact of the breakdown. Support and resistance levels show signals of the market movement, how steady the trend is and who dominates there (bulls or bears), which level of uncertainty is greater, and which is less.
Important point # 2: the levels on the chart “live” at any time
Each time period on the chart should be applied to the next two levels: the nearest resistance level and support level. The closest is the last level.
Hence, important point # 3: the levels do not depend on the timeframe
Support and resistance levels — they aren’t a mark, but they are a price’s zones, there you can see a reverse of the trend. Simply put, the price zone shows us like “No, that wasn’t the deal. Let's slow down”.
This is how it looks like
During the bullish trend, traders think whether the asset is not overvalued, they buy less, and they run into the resistance level. Right here you can meet sellers who want to reduce the price.
During the bearish trend, traders reduce the price and start to doubt about a possible price increase, this offer attracts more buyers. This is how the support level works.
How to determine support and resistance levels
1) You should check the right edge of the chart.
Levels can be applied to historical data in order to train or to test it. But they show the current direction of the trend, and they are constantly updating. As soon as the market breaks through the level, it becomes irrelevant.
2) Trying to find a price reversal point: at least two candlesticks in each direction:
Two bullish and two bearish candlesticks: a turning point from growth to decline
Two bearish and two bullish candlesticks: a turning point from the fall to the rise
Two bullish and two bearish candlesticks do not always follow strictly one after another. It is assumed to have some candlesticks with the opposite direction. Therefore, you need to make a task:
3) Find the second minimum point for the support line and the maximum point for the resistance.
This confirms that the level is forming
How to hold the support and resistance lines
The support line is an asset price zone, some traders undervalue it. The line passes through two or more minimum, runs with a positive inclination angle relative to the time axis.
It’s enough to define two points in order to hold it. The first minimum appears at the very beginning when the trend begins to grow. The second comes to the market if large investors enter the trade and small investors have made their profit. Prices rise again, the market is moving away from the minimum. That’s enough to make a line based on these two points.
The resistance line is the variation in asset price, some traders believe that it is overvalued. Unlike the support line, the resistance passes through two or more maxima, with a negative inclination angle relative to the horizontal axis.
As you may have noticed, the support and resistance levels are the price zone. Let's discuss them.
This price zone occupies the same range as the shadow of the most extreme candlestick. The price zone lies between the body of the candlestick and a distant part of its shadow. Check out the chart:
- The resistance level covers the distance between the upper border of the shadow of the furthest candle and the upper part of the candlestick's body:
- The support level covers the distance between the lower border of the candlesticks’ shadows and the lower border of the candlesticks’ bodies:
Let’s repeat what we’ve learned, plus a few consequences
The resistance level is the closest price zone:
- Covers the distance between the upper border of the candlestick shadow and the upper border of the candlestick’s body,
- The pivot point goes downward
- It can form only above the current price.
The support level is the closest price zone for us:
- It combines the distance between the lower border of the candlestick shadows and the lower border of the candlestick bodies,
- Pivot point from bottom to top
- It can form only below the current price.
How to determine the importance of support and resistance lines
Check out these 4 basic options:
- number of touches;
- tilt angle.
The bigger it is, the more important the line. So, the lines on the weekly chart are more important than on the daily chart.
The reliability of the signals depends on the length of the line. The longer the line, the more reliable its turn signal after the breakdown. However, it can be not only direct but also reverse: the length of the line reduces the reliability of the signal.
Number of touches
The more you have, the more reliable is the line. Each next point makes the line more significant, and the fourth and the fifth touches show that the group that leads the market has great potential.
The decline angle between the line and the horizontal axis
The sharper the line, the faster the trend develops.
How to read the chart: properties of support and resistance levels
This line has two main tasks:
- Determine the trend
- Notify about opening and closing positions.
Knowledge about the internals helps to solve these problems.
A feature of the level №1:
a direction of the breakdown is likely to define the direction of the market
For example, the market broke through the resistance level, it happened on the rise, This is a signal of further growth:
However, there is a great chance that the rise won’t start immediately, also, the opposite result may happen: in our example, the market will slide down a little bit:
It’s important to know that a step backwards is ok, and this isn’t a trend. If the market breaks the resistance level again - this is the second signal of the trend. If the market continues moving and moves on and closes even higher, the previous resistance level will become irrelevant, a new one may appear:
The old resistance level may turn into a support level, but we'll discuss this later.
This should be considered as breakdown:
The candlestick should open and close above and below the levels.
Situations on the chart which cannot be considered as a breakdown:
- The market touches the level or makes a shadow:
This is called testing the levels if:
- The market opens below and closes above the level:
- The candlestick is formed slightly above or below the level, it forces traders to zoom the chart and gaze at it. In this case, you should wait in order to see if it is confirmed or not, wait for the next candlestick. It’s quite simple: other traders gaze at the chart and hesitate too. So, it’s hard to predict their decision, therefore the signal is less reliable than it can be.
So, today we’ve found:
- Support and resistance levels are price zones, right there the fate of a trend will be decided.
- The direction of the level’s breakdown shows the market direction.
- The level’s breakdown is considered to be opening and closing the candlestick strictly above and below the resistance and support levels.
- When the support level is broken, we can say that it is no longer relevant, the trend is downward, and the market will move down rather than up.
- The same works for the resistance levels.
Right here you can open TradingView:
1. Open SmartTrade
2. Find this “TradingView” checkmark
3. Bingo :)
As you can see, the support and resistance levels are quite simple. It’s much harder to get used to applying them.
That’s why we’ve prepared a task for you:
Find all available configurations that we’ve described here on the real chart: open 3Commas.
Next time, if you practice enough, you’ll find out the second feature of the levels and how to determine the signals for opening and closing positions.
In the third part find out what happens after the support and resistance lines breakthrough and how to determine the best market entry points. We mean the points with high potential and low risks (in comparison with alternatives).