Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XI the focus will be on Support and Resistance Levels.
Support & Resistance Levels
When trading, a user can often notice specific levels where the price of an asset struggles to push beyond. These levels are known as support and resistance levels. They are tow of the most used terms discussed by traders when using technical analysis, and can be key in identifying levels to enter and exit trades. The are basically the points on a chart where a trader can expect and asset to pause or reverse in price action, support levels are known as levels where a down trending asset is expected to reverse, and resistance levels are where the up trending asset is expect to reverse. Many traders note these levels as barriers, and use them as part of analysing chart patterns. A key note to these levels is that while they may seem easy to understand and identify at first, they can come in various forms and therefore are more difficult to identify than many users would initially believe.
Calculating Support & Resistance Levels
To calculate the support and resistance levels a trader does not need to make use of any formulas. Instead, this is purely noted from the candlestick charts and observing the price action over time. The levels for support and resistance can be identified on charts by using historical data, previous support and resistance levels, technical indicators, trendlines, and moving averages. It can be easy to spot these levels once a trader understand how to see them and make use of them.
Historical Price Data
This is seen as the most reliable way of indicating and identifying support and resistance levels. It is invaluable for a trader to look back over a chart before entering any trade, and to pick out the levels. A trader does this buy looking at different time frames and identifying the levels where the price hit its highest and lowest. From here a trader can draw out support and resistance levels, and the more times a price has hit these levels, the more reliable the level is.
Previous Support and Resistance Levels
Any previous notable support and resistance levels can be used as markers when entering a trade, However, it is important to note that major support and resistance levels rarely are shown as an exact number, instead are an indication of an area or zone. Added to this that a level can change over time as prices of an asset break beyond their support and resistance levels, its import to not rely on previous levels alone.
Technical Indicators
TA or trendlines can show dynamic support and resistance levels that move as the chart progresses over time. These levels are often based on different factors, so it means a users needs to spend time understanding these different indicators and which one can / will have the biggest impact on a markets price at any given time. These indicators can include:
- Peaks and troughs
- Support and resistance levels from a previous timeframe
- Moving averages
- Trend lines
Peaks and Troughs
Firstly a trader must select their timeframe, and then find the highest peak on their chart, along with finding the lowest point. Then a trader marks each peak and trough (where the price changes direction). If the overall trend is downwards, the lower low peak will act as the support level, while the lower high peak will be the resistance level. Conversely, if the overall trend is upwards, the higher low peak will be the support level while the higher high peak will be the resistance level.
The above image showing the Support and Resistance levels from Peaks and Troughs is taken from IG.com
Previous Timeframes
Making use of previous timeframes if good for trading on a short timeframe chart, such as the 15 minute chart. Initially a trader should draw the levels from the 15 minute chart, and then draw the levels again from the data on the 1 hour and 4 hour charts. If all the levels are similar or equal to the levels from the 15 minute chart, these are considered strong levels of support and resistance.
The above image showing the Support and Resistance levels from Previous Timeframes is taken from IG.com
Moving Averages
To use the moving average as an indicator, a trader first needs to draw a diagonal line from the highest peak to the lowest peak on the chart. This will identify the direction of the trend. If the trend is moving upwards, then the moving average will act as a level of support. If its moving downwards, the trendline will act as a level of resistance. This is known as a dynamic level of support or resistance, as the level is constantly changing.
The above image showing the Moving Average as a Support and Resistance level is taken from IG.com
Trend Lines
To make use of trend lines, a trader should ensure they have at least three peaks or three troughs before drawing a line. This will ensure its a useable trendline. Once this has been drawn on the chart, an uptrend line will be the support level, when a downtrend line will be the resistance level. These are similar to moving average support and resistance levels, as they are dynamic.
The above image showing the Trendline as a Support and Resistance level is taken from IG.com
It is important for a trader to combine one or more of the methods above to establish the most accurate support and resistance levels.
How to use Support & Resistance Levels
To make use of support and resistance levels when trading, a user must calculate where these levels are for their desired asset. These levels can often be referred to as levels which prevent a trader from pushing the price of the asset above or below these levels. To make use of the support or resistance levels a trader should look at what the overall trend of the market is.
If the market is in an uptrend, for example, it will often hit a point where the momentum and rate of rise in price slows. Once this happens, it will generally be because the asset is hitting its resistance level. These levels can be regarded as a ceiling, as it if often the point where the asset reaches before it can go no further, and sees a change in price direction. It can often get very close to moving above this level, and sometimes even briefly rise above it, before falling again. Due to this, traders will often see the resistance level as a good price point for entering a short position. The price of the asset should start to move back towards the trendline, and therefore a short position will bring in profit from a trade in this position. Of course making use of moving averages and other technical analysis can help to ensure that the trend is changing and the short position is worthwhile. A warning to traders is that once an asset breaks above its resistance / ceiling level, it can often see extreme upward movement in price. This scenario would almost certainly lead to a liquidation of a short position.
The support level, also known as the bottom, works in reverse. This is the area where it is most common to place a long position. Many traders make use of the support and resistance levels as strategic entry/exit points, as they often give a strong indication of the prices which has the biggest effect on an assets direction. These levels also given traders the ability to manage risk and where to place their stop loss limits. This makes most traders who rely on these levels very confident in their understanding of the underlying value of an asset, as the selling / buying volume at these levels will make it difficult for other traders to push the price beyond these levels. A key reminder is to wait for the price to confirm it is following the support or resistance levels and not continuing in the existing trend before placing a trade.
Another strategy used is known as the breakout strategy. This is where a trader waits for the price of an asset to push beyond its support or resistance level. A breakout is not just a slight movement beyond these levels, but a defined and rapid movement of increased momentum, which can create the opportunity for maximum profits. Also is should be noted how a support level can become a resistance level, and vice versa, once the price of an asset moves beyond it.
Limitations of Support & Resistance Levels
There are many benefits of using the support and resistance levels when trading, and all traders should familiarise themselves with identifying these levels before entering a trade. However, a trader also needs to be aware that these levels are constantly changing, and are not a fixed price but more of a zone. Traders should therefore constantly be checking and rechecking these levels to ensure there are still correct.
Also a trader needs to beware or an asset breaking beyond its support or resistance level, instead continuing in its current trend and pushing beyond to its next level. Therefore a trader should have multiple support and resistance levels indicated on their chart, and see these as their trading zones.
Finally, when trading and making use of support and resistance levels, a trader needs to note that often an asset make peak at its support or resistance zone for some time before a change in trend, or a breakout, takes place.
Conclusion on using a Support & Resistance Levels for TA
As a trader, whether it be day trading or long term trading, using support and resistance levels is the most basic of assets to utilise before entering a trade. They can be very beneficial in showing a trader the levels where they can expect the momentum of an assets trend to slow down, and change direction. They are calculated via various methods, including looking over historical data and making use of technical indicators such as moving averages. The resistance level is often the highest price point an asset is reaching in its current period of trading, while the support level is the lowest price an asset is generally reaching. An asset can push beyond these level, and then return to trading within them, or it can breakout beyond is a rapid movement which can yield high returns for trading. These levels are never seen as specific prices, instead as zones, and an experienced trader should have multiple support and resistance zones noted on their charts in anticipation of a breakout and knowing where its next level will be. Also it is important for traders to continually review their support and resistance levels, as they can be constantly changing. Therefore support and resistance level indicator's should not be used as a standalone indicator, instead it should be used in conjunction with other indicators to give stronger results and more reliable signals, especially trend, momentum, and volume indicators.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals with an asset constantly hitting its support or resistance levels before reversing its trend, making a trader enter a trade only for the price to breakout beyond its level.
It is important to use support and resistance indicator's along with other TA to get the correct signals for understanding the strength of a trend and its levels. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall support and resistance levels, ensuring they are similar or equal to give an even stronger indication to the strength of a level.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis - Part X - Parabolic SAR Indicator
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on Fibonacci Retracement Levels. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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