4 ways investors use support and resistance levels to make better trades

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You can make money in the markets using support and resistance levels. This is a simple concept that is used by many traders. However, it is important to understand some of the basics when using support and resistance to your advantage. This article will offer some insight into this and other aspects of technical analysis.

The concept of support and resistance (or what some call “pivot points”) is one of the most important market dynamics that traders, day-traders, and long-term investors alike can use to their advantage. This article will explain how support and resistance levels are used by traders to make better trades.

Support and resistance levels are the most important indicators for an investor, and they are the foundation of any successful trading strategy. “Support” is defined as the price of an asset being below a certain level, while “resistance” is defined as the price of an asset being above a certain level.

Trading should be a simple process of buying low and selling high, but for many investors it looks more like rocket science. One of the simplest and easiest to understand strategies to accomplish this is to identify the asset’s support and resistance levels.

Once traders are able to identify support and resistance levels, they can improve their market entry and exit times. Support and resistance are also useful in bull, bear and range markets.

Let’s go back to the basics.

What are the supports?

Support occurs at the level where the buyer’s demand absorbs the seller’s supply, preventing the price from falling any further. At this level, rising traders tend to buy because they feel the price is attractive enough and cannot go lower.

On the other hand, bears stop selling because they feel the market has fallen enough and may be ready for a rally. When these two situations occur, a fortress is formed.

Daily chartof EOS/USD. Source: TradingView

4 ways investors use support and resistance levels to make better trades

The chart above is a good example of strong support. Every time the price of EOS drops to the $2.33 mark, buyers report and sales drop. As a result, demand exceeds supply, leading to an increase.

Although horizontal supports are considered more reliable, they are not the only way to form supports. During uptrends, trend lines serve as support.

Daily chartLTC/USDT. Source: TradingView

4 ways investors use support and resistance levels to make better trades

Litecoin (LTC) began its uptrend in December 2020. After that the price bounced back to the trendline several times. This happened because as the price approached the trend line, the bulls started buying, thinking that LTC/USDT had reached attractive levels to buy.

At the same time, counter-trend traders have stopped selling, believing that oversold conditions could develop in the near term. These two events simultaneously led to the end of the correction and the resumption of the upward trend.

What are the resistance values?

Resistance can be seen as the opposite of support, as it is the level at which supply exceeds demand, stopping the upward movement.

Resistance is formed when buyers who bought at lower levels start taking profits and aggressive bears start selling because they think the rally is over and a pullback is possible. When supply exceeds demand, the rally stops and reverses.

Daily chart BTC/USDT. Source: TradingView

4 ways investors use support and resistance levels to make better trades

Support and resistance do not have to be at the same level. The chart above shows how the area between $10,500 and $11,000 has acted as a resistance zone. Whenever the price reached this area, short term traders took their profits and aggressive bears sold the BTC/USDT pair. Between August 2019 and July 2020, the pair pulled back from the resistance zone five times.

As with support, a resistance line or zone need not always be horizontal.

ETH/USDT Daily Chart. Source: TradingView

4 ways investors use support and resistance levels to make better trades

During the fall of 6. May 2018 at 4. July 2018 Ether (ETH) rose to the resistance line, also known as the downtrend line, but reversed down from there. This is because bearish traders took advantage of the rally to open new short positions as they expected lower levels.

At the same time, aggressive bulls, who had bought on the sharp declines, closed their positions near the resistance line. As a result, the line acted as a wall and the price came back down.

Establishing supports and resistances during the consolidation phase

Daily chartof EOS/USD. Source: TradingView

4 ways investors use support and resistance levels to make better trades

When support and resistance are clearly defined, as in the EOS/USD example above, traders can buy on a rebound from support and wait for the price to rise close to resistance before closing the position. The stop loss of the trade can be held just below the support of the range.

Sometimes professional traders try to hit these stops by dropping the price below the support of the range. Therefore, traders can buy upwards and wait for the price to close firmly below the support level before liquidating their positions.

Trading support in an uptrend

When an asset gets three times the support of an uptrend line, traders can expect the line to hold. Therefore, long positions may be taken on a rebound from the uptrend line. Stops for the trade can be held just below the trend line.

In an uptrend, however, a break below the trend line does not necessarily mean that the trend has reversed. In many cases, the trend is simply interrupted and then resumed.

ETH/USDT Daily Chart. Source: TradingView

4 ways investors use support and resistance levels to make better trades

As you can see on the chart above, the ETH/USDT pair has found support on the uptrend line on several occasions. However, when the pair broke the uptrend line, it did not start a new downtrend. The price consolidated in a range for a few days before resuming an upward movement.

Traders can close their long positions if price falls and closes below the uptrend line, but new short positions should be avoided. If the price is going to show an upward trend again after a consolidation, traders can start looking for buying opportunities again.

Resistance moved tosupport

When the price breaks out of resistance, the bulls try to turn the previous resistance into support. When this happens, a new uptrend will begin or resume. If this happens repeatedly, it can be a good buying opportunity.

Daily chart BTC/USDT. Source: TradingView

4 ways investors use support and resistance levels to make better trades

Bitcoin is stuck in the $10,500 to $11,000 zone from August 2019 to July 2020. After breaking through the resistance zone, the price fell back below $10,500, but the bulls aggressively bought back this decline and turned this level into support. This offered traders a good buying opportunity as the new uptrend had just begun.

Supporting changes in resistance

DOT/USDT Daily Chart. Source: TradingView

4 ways investors use support and resistance levels to make better trades

The above chart from Polkadot (DOT) shows the area between $28.90 and $26.50 from Feb. 14 through 18. May of this year served as a fulcrum. But when the bears took price below the support zone, that zone became a resistance zone and price has not been able to break above it since. This is the case when the support zone has turned into resistance.

Main outputs

When analyzing a currency, traders should look for support and resistance levels, as these can serve as good entry and exit points.

In an uptrend traders should buy at support levels and in a downtrend they should sell short at the resistance line.

Support and resistance levels are not set in stone, and professional traders will try to find stop orders. Therefore traders need to keep their stops in place in order not to get caught out by market makers.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph.com. Every investment and every transaction involves risk. So you need to do your own research before making a decision.Support and resistance are great tools for investors, whether you are a day trader or a long-term trader. You can see how a stock or cryptocurrency moved recently, and how it is likely to move in the future. When prices rise above the resistance level, they tend to fall. And when prices fall below the support level, they tend to rise. This is why support and resistance levels are considered indicators for the current trend.. Read more about how to find support and resistance levels and let us know what you think.

Frequently Asked Questions

How do you trade with support and resistance?

A support level is a price level where the price of an asset tends to bounce back after a fall. A resistance level is a price level where the price of an asset tends to bounce back after a rise.

What is resistance and support in trading?

Resistance is the price level at which a stock or index experiences a significant amount of buying pressure and starts to move up. Support is the price level at which a stock or index experiences significant selling pressure and starts to move down.

How do you use a support and resistance indicator?

A support and resistance indicator is a technical analysis tool that is used to determine the price range of an asset. The indicator is based on the idea that when a price falls below a support level, it will bounce back up. When it rises above a resistance level, it will fall again.

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About the author

Emilia James
By Emilia James

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