Support and Resistance - Where Prices Stop
What are Support and Resistance
Support and resistance are the most fundamental yet most important concepts in technical analysis. It's no exaggeration to say that identifying support and resistance should come before any other analysis on a chart.
Support is a price level where a declining price meets buying pressure and bounces back instead of falling further. It acts like a "floor" supporting prices from below.
Resistance is a price level where a rising price meets selling pressure and gets pushed back instead of rising further. It acts like a "ceiling" pressing down on prices from above.
These two concepts serve as a map showing where prices are likely to react. If knowing how to read candlestick charts is like knowing the alphabet, identifying support and resistance is like understanding the meaning of sentences.
Why Support and Resistance Form
Support and resistance arise from market participants' psychology.
Psychology Behind Support Formation
Suppose there are investors who bought at a certain price level. When price rises and then returns to that level, investors who experienced profits recognize "this price is a good buying point" and add to their positions. Meanwhile, investors who missed the previous buying opportunity also try to enter at this level. This accumulation of buy orders forms support.
Psychology Behind Resistance Formation
Conversely, investors who bought at a certain level and are holding losses as price declined will try to sell at "break-even" when price recovers to their entry price. Also, traders who sold at that level before and took profits will try to sell again at the same price. These sell orders form resistance.
Support and resistance are not precise "lines" but rather "zones" or "areas" within a range. In practice, prices rarely bounce at exactly one price—most reactions occur within a certain range.
How to Find Support and Resistance Levels
1. Historical Highs and Lows
The most basic method is finding price levels on the chart where price bounced or got rejected multiple times.
- Connect points where price fell and then bounced horizontally to form a support line.
- Connect points where price rose and then got rejected horizontally to form a resistance line.
The more reactions at the same price level, the stronger that support/resistance becomes.
2. Round Numbers (Psychological Price Levels)
Support/resistance often forms at clean numbers like Bitcoin at $30,000, $50,000, or $100,000. This is because human psychology assigns significance to round numbers. Many traders place orders at these price levels.
3. High Volume Areas (Volume Clusters)
Price levels where volume is concentrated act as strong support/resistance. High trading volume at a certain price means many participants have stakes at that level. Using Volume Profile indicators can visually identify these volume clusters.
4. Moving Averages
Moving averages also act as dynamic support/resistance. The 50-day, 100-day, and 200-day moving averages in particular often see price reactions because many traders watch them.
5. Trendlines
Trendlines serve as diagonal support/resistance. Rising trendlines act as dynamic support, while falling trendlines act as dynamic resistance.
Role Reversal: Support Becomes Resistance, Resistance Becomes Support
One of the most important concepts in support and resistance is Role Reversal.
- When support is broken downward, that price level later becomes resistance.
- When resistance is broken upward, that price level later becomes support.
This phenomenon can be explained psychologically. For example, suppose investors bought at a support level, but price broke below it and declined. These investors are now in a loss position, and when price rallies back to the previous support level, they sell to "escape at break-even." This is how previous support transforms into resistance.
Role reversal occurs very frequently and is a core concept used to determine entry and exit points in practice.
Breakouts vs Fakeouts
Breakout
When price moves above resistance or below support, it's called a breakout. When a genuine breakout occurs, price tends to move strongly in the breakout direction.
Criteria to confirm whether a breakout is real:
| Confirmation Factor | Real Breakout | Fake Breakout |
|---|---|---|
| Volume | Volume spikes on breakout | Little volume change |
| Candle Close | Candle closes above/below the breakout level | Only wick crosses, then returns |
| Follow-through | Sustained trend after breakout | Immediate pullback after breakout |
| Retest | After breakout, retests previous resistance/support as new support/resistance | Returns to previous range on retest |
Fakeout (False Breakout)
When price temporarily moves beyond support/resistance and then immediately returns, it's called a fakeout. Getting trapped by fakeouts and taking wrong positions can lead to significant losses.
How to avoid fakeouts:
- Wait for candle close: Prices often temporarily break out during the session but return, so wait until the candle closes.
- Confirm volume: Real breakouts should be accompanied by volume increase.
- Wait for retest: After a breakout, waiting for price to return to previous resistance/support for confirmation (retest) before entering is safer.
- Check multiple timeframes: Verify if a breakout on a smaller timeframe is also meaningful on a larger timeframe.
Criteria for Judging Support/Resistance Strength
Not all support and resistance levels carry equal weight. The following factors determine the strength of support/resistance:
1. Number of Touches
The more times price reacts at that level, the stronger it is. A support level that bounced five times is stronger than one that bounced twice. However, remember that if tested too many times, it may eventually break.
2. Recency
Recently formed support/resistance is generally more valid than old ones because market participants' memory is fresh. However, support/resistance that has held for years carries very strong significance in itself.
3. Volume
The higher the volume traded at that price level, the stronger the support/resistance. This is because many participants have stakes there.
4. Timeframe
Support/resistance identified on daily charts is stronger than those on 1-hour charts. Support/resistance identified on weekly or monthly charts are key price levels that determine major market trends.
5. Round Numbers
Psychological price levels ($10,000, $50,000, etc.) receive additional strength.
Practical Tips for Support/Resistance in Cryptocurrency Markets
Differences Between Major Coins and Altcoins
Support/resistance analysis is more reliable for coins with abundant volume like Bitcoin and Ethereum. In contrast, smaller altcoins may easily break through support/resistance due to insufficient liquidity.
Relationship with Bitcoin Dominance
When analyzing altcoin support/resistance, Bitcoin's movement must also be considered. When Bitcoin breaks below major support, altcoin support levels often collapse together.
Trading Strategies at Support/Resistance Zones
- Bounce Trading: Buy when reversal candlestick patterns appear near support, sell when reversal patterns appear near resistance.
- Breakout Trading: Buy when resistance breaks with volume, sell when support breaks.
- Stop-Loss Placement: When buying at support, place stop-loss slightly below support; when selling at resistance, place stop-loss slightly above resistance.
Think in Terms of Zones, Not Exact Prices
As emphasized earlier, support and resistance are zones within a range, not exact prices. When we say "Bitcoin $50,000 support," it may mean a zone roughly between $49,500-$50,500. It's more realistic to approach with zones rather than placing orders at exact prices.
Summary
Support and resistance are the foundation of technical analysis. Understanding these two concepts allows you to identify key price levels where prices are likely to react, and based on this, establish rationale for entries, exits, and stop-losses.
Key takeaways:
- Support is the floor where buying pressure gathers; resistance is the ceiling where selling pressure gathers.
- Always watch for role reversal. Broken support becomes resistance; broken resistance becomes support.
- When breaking out, check volume and candle close to filter out fakeouts.
- Number of touches, volume, and timeframe determine support/resistance strength.
- Approach as "zones," not precise "lines."
In the next article, we'll cover trendlines—a key tool for identifying market direction alongside support/resistance.
Next article: Trendlines - Drawing the Market's Direction