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Technical Analysis - Support and Resistance

Trading crypto, stocks, currency, or metal is a game; and like any other game, it has its own set of simple rules. Let’s start learning a few simple analysis rules to understand support and resistance levels.

Rule # 1

Bulls and Bears: Two players are involved in the Game of Trading; the bulls and the bears. This simple analogy will help us understand the above topic simply yet lucidly.

Rule #2

The bulls are programmed to push prices higher (Up), while bears are programmed to drag prices lower (Down). Very simple right? Yes, we want to keep it simple.

Rule #3

When a new high is printed, the bulls score a point and pull back. On the other side, when a new low is printed, bears score a point and pull back. This rule is worth remembering to avoid pitfalls.

Support and Resistance
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Support and Resistance
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As bulls and bears take control and score points, critical supports and resistances are formed and broken. Let us now turn our attention to understanding support and its significance.

 

Lows and Supports

Before we understand supports, let us first define a low since it’s the first step to carving a strong support level. When we have a group of five candlesticks and the low of the centre candlestick is the lowest, it is a technical low.

Support and Resistance
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Please note the arcs consisting of five candles and the low defined in the chart pattern above. It’s helpful and essential to find the lows in a rising market since they are potential supports! The stop-loss goes below the low when we enter buying.

Now, let us clearly define and understand support. In simple terms, support is a specific price or range which holds market prices higher than itself. To give a crude example, your support at the moment could be a chair or a couch. It keeps you from falling lower, as supports hold prices higher.

 

Technical Definition of Support

Support is low, which fulfils the following two requirements:

  1. It is higher than the previous low.
  2. The market has printed a new high already.

Support and Resistance
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The price chart above notes that $28,700 is higher than $16,200, and a new high is in place at $69,000. Hence it is defined as S2 on the chart. Similarly, S1 at $39,500 is higher than $28,700 with a new high in place.

What do you think of $39,600 carved on the right side of $69,000 highs? Can we define it as support yet? The answer is no; since we do not have a new high above $69,000 yet. But it can be defined as a low, which has the potential to become future support.

 

Points to Remember While Identifying a Support Line

  1. Supports are always formed in a rising market. We should focus on identifying supports only when markets rise; you will save much time.
  2. Until the time S1 is intact, prices are expected to print higher highs. Hence significance is of the support when markets are rising.

Steps to Identify Supports the Right Way

  1. Identify the highest point in a rising market. It is $69,000 on the above chart.
  2. Drag your mouse inclined backwards from there and stop at each low defining S1, S2, and so on.
  3. On the above chart, the first low is $39,500 (S1), followed by $28,700 (S2) $16,200 (S3), respectively.

 

Do It Yourself: Identify Supports

DIY support and Resistance
Click the image to view full-size and practice identifying supports.

 

Highs and Resistances

Let us now focus on understanding a technical high before moving on to resistances. When we observe a group of five candles, and the centre candlestick high is the highest of them all, it is the technical high.

Support and Resistance
Click the image to view full-size.

On the chart above, note the arcs consisting of five candles and the high defined. If we find the highs in dropping markets, they are potential resistances! The stop-loss goes above the high when we enter selling.

Now, let us clearly define and understand resistance. In layman terms, resistance is a specific price or range which holds market prices lower than itself. To illustrate again, our current resistance level could be the ceiling. Ignoring gravity, it keeps us from rising beyond, as resistances hold the price level lower.

 

Technical Definition of Resistance

Resistance is a high which fulfils the following two requirements:

  1. It is lower than the previous high.
  2. The market has printed a new low already.

Support and Resistance
Click the image to view full-size.

On the chart above, $60,000 is lower than $66,000, and a new low is in place at $41,274. Hence it is defined as R2 on the chart. Similarly, R1 at $52,100 is lower than $60,000, with a new low in place at $39,600.

What do you think of $44,450 carved on the right side of $39,600 lows? Can we define it as a resistance yet? Again, no - we don’t have a new low below $39,600 yet. But it can be defined as a high, potentially becoming a future resistance.

Having said that, if prices break above $44,450, the above probability is ruled out.

 

Points to Remember While identifying a Resistance Line

  1. Resistances are always formed in a dropping market. We should focus on identifying resistances only when markets drop.
  2. Until R1 is intact, prices are expected to print lower lows. Hence significance is of the resistance when markets are dropping.

Steps to Identify Resistances the Right Way

  1. Identify the lowest point in a dropping market. It’s $39,600 on the above chart.
  2. Push your mouse inclined backwards from there and stop at each high defining R1, R2, and so on.
  3. On the above chart, the first high is $52,100 (R1), followed by $60,000 (R2), $66,000 (R3), and $69,000 (R4), respectively.

 

Do It Yourself: Identify Resistances

Support and Resistance
Click the image to view full-size and practice identifying resistances.

 

Rule #4

  1. In a rising market, past resistance can become future support.
  2. In a dropping market, past support can become future resistance.

The above rule helps us determine the entry point in our next technical analysis story: “Trends and Trend Lines”.

 

Summary of Main Points

  1. Supports are formed and are significant in a rising market.
  2. Resistances are formed and are significant in a dropping market.
  3. The bulls score a point after a high and pull back.
  4. After a low, the bears score a point and pull back.
  5. Past support has the potential to become future resistance.
  6. Past resistance has the potential to become future support.

About the author:

Harsh Japee

Disclaimer:

The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.

 

Last updated: 17/02/2022

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