Resistance and Support
Resistance and Support levels
Resistance and support levels are always important when it comes to technical analysis regardless if you’re trading commodities, forex or cryptocurrencies. These predetermined levels play important roles as they point out where the current trend might stop and reverse.
In short – you can either expect more buying or selling orders to build up in a specific zone. When the price of an asset decreases, more buyers might gradually appear as the demand increases and form a level of support. Similarly, during an uptrend, you might notice more selling pressure forming a resistance zone.
Validation and invalidation
When a support or resistance zone is reached, the asset you’re trading is likely to either bounce back up or get rejected. Traders utilize these levels as additional indicators when opening long or short positions, depending on the trend.
NOTE: Green for support, Red for resistance
These levels can be easily spotted on the yearly BTCUSD chart. Of course, the indicator can be applied to any time frame chart.
For some traders, support and resistance zones play an important role. There are exceptions when the market is excessively bearish or bullish. Assets like Bitcoin tend to ignore all indicators as seen in 2017’s bullrun. It has proven very difficult for retail investors to correctly assess where significant support and resistance levels can be expected.
Round Number Significance in Resistance and Support zones of Bitcoin
Rounds numbers also have a big role in any market due to human psychology. Bitcoin, for example, shows heavier resistance levels at round numbers like 1k, 2k, …, 20k dollars. All-time highs usually consolidate around round numbers before a severe correction occurs.
How to measure significant support and resistance zones?
There are multiple ways to measure and identify support and resistance levels when performing a technical analysis using clear indications in order to notice if an asset is closing at a significant price level, such as:
Number of level tests
If a said price level is tested multiple times, this is an indicator of hitting a major zone. The more an asset gets rejected or bounces back, the more traders will be utilizing those price levels. A higher number of price level touches means that eventually there will be a bigger breakout.
Preceding Price movement
If there’s a steep price movement either to the upside or to the downside, the support and resistance zones are likely to be much more significant.
Time
Support or resistance zones become clearer if they are tested many times over longer periods of time.
Can support become resistance and vice versa?
If an asset’s price breaks through a significant resistance level and continues to rise, that former resistance level is now expected to act as new support. For example, if BTC breaks through the 10k USD resistance zone, it is now expected the support level to be 10k USD.
Conclusion
The support and resistance levels are usually very significant, but in some cases, markets can be overly exuberant and ignore any technical analyses. One of the perfect examples is Bitcoin in its last two bull runs. This indicator is best combined with the RSI or Fibonacci retracement tool, as these indicators provide a picture of significant price levels where the price of an asset may react.
Sources:
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