Identifying key support and resistance Levels is an essential Technical Analysis tool. Once you understand these concepts and are capable of plotting them out on a chart then you’ll be well on your way to making better trading decisions.
In and around the support levels (green lines) are the points at which demand is thought to be strong enough to drive the price upwards. Traders are looking to buy and bulls are taking control (2).
In and around the resistance levels (red lines) are the points at which demand is thought to be weak enough to stop the price rising any further and ultimately drive the price downwards. Traders are looking to sell and bears are taking control (1).
Market Range or Trading Range
The areaÂ between these levels, known as the range, can be labelled as the warzone; this is where the Bulls(Market Buyers) and the Bears(Market Sellers) are battling it out for dominance.
When the price breaks through a resistance line and begins to fluctuate within a higher market range then the market is said to be in an uptrend. Previous Support levels often become resistance levels and previous resistance levels often become support levels. Higher highs (3) and higher lows (4) are formed.
When the price declines into a lower trading range and fails to stay above the key support line then the market is said to be in a downtrend. The support line transitions into a resistance line. Lower highs (5) and lower lows (6) are formed.
Testing Key Levels
In cryptocurrency trading the price movements can be very volatile. The price will never consistently bounce or fall exactly along these support/resistance line, as per (7) in my visual above. Other TA tools and indicators are needed to help determine if a support or resistance line has been definitively broken, for the short term.
This is a super basic synopsis of the fundamentals behind support and resistance levels. For live chart examples and to flesh out the concepts introduced in the post, I highly recommend that you watch the excellent video below from Decisive Trading.
If you are relatively new to this space then the simplest piece of advice I can give you is:Â Invest all your time in learning, not all your money.
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