Contents

• Introduction
• What are support and resistance levels?
• How Traders Use Support and Resistance Levels
• Psychological Support and Resistance
• Trend Line Support and Resistance
• Moving Average Support and Resistance
• Fibonacci Support and Resistance
• What is Fusion in Technical Analysis?
• Summary

Introduction

The concepts of support and resistance are Some of the most basic topics related to technical analysis of financial markets. They are basically suitable for any financial market, whether it is stocks, forex, gold or cryptocurrencies.

These concepts are easy to understand, but difficult to truly master. Reading support and resistance can be completely subjective, they play different roles in changing market conditions, and you need to understand the different types of support and resistance. But most importantly, you need to learn a lot of diagrams. This guide will help you get started.

What are support and resistance levels?

At their most basic level, support and resistance are very simple concepts. When price is at a level that it cannot break, that level is a barrier of sorts. Support means that the price reaches the "floor", while resistance means that the price reaches the "ceiling". Basically, you can think of support zones as demand zones and resistance zones as supply zones.

While support and resistance are traditionally represented as lines, reality is often less precise. Remember: markets are not driven by physical laws that prevent the market from breaking through a certain level. Because of this, it is more appropriate to think of support and resistance as areas. You can think of these areas as ranges on a price chart that may push traders to increase activity.

Let’s look at an example of a support level. We notice that price keeps moving into areas where assets are being bought. When this area is repeatedly tested multiple times, a support range forms. Since the bears (sellers) are unable to push the price further down, the price eventually rebounds – possibly starting a new uptrend.

The price fluctuated in the support area before breaking out.

Now let’s look at the resistance level. As we can see, prices are trending downward. But after each rally, it failed to break out of the same area multiple times. Resistance levels form because bulls (buyers) are unable to take control of the market and push prices higher, causing the downward trend to continue.

The price is unable to break out of the resistance zone.

How traders use support and resistance levels

Technical analysts use support levels and resistance levels to find areas of concern on the price chart. In these areas, the likelihood of a reversal or pause in the underlying trend may be higher.

Market psychology plays a huge role in the formation of support and resistance levels. Traders and investors will remember previous price levels that increased interest and trading activity. Since many traders may be observing at the same level, this may allow increased liquidity in these areas. This often makes support and resistance areas ideal for large traders, or whales, to enter or exit positions.

Support and resistance are key concepts for proper risk management. If these areas can be identified consistently, it can lead to favorable trading opportunities. Typically, once price reaches a support or resistance area, two things can happen: The price will either bounce off that area, or it will break out and continue further in the direction of the trend - until it reaches the next support or resistance area.

Entering trades close to support and resistance levels is a beneficial trading strategy. Mainly because this position is relatively close to the failure point - we usually place a stop loss order at this point. If the area is breached and the trade is invalid, the trader can cut their losses and exit with a small loss. In this sense, the further the entry is from the supply or demand area, the further away it is from the point of failure.

Also to consider is how these price points respond to changing circumstances. Generally speaking, a broken support area can turn into a resistance area when it breaks. Conversely, if the resistance area breaks, it may turn into a support level when tested again. These patterns are sometimes calledSupport Resistance Reversals.

When tested again, the support area broke and turned into resistance district.

This pattern is confirmed by the situation where a previous support zone now becomes a resistance zone (and vice versa). Therefore, it may be advantageous to enter while this area is being retested.

Another thing to consider is the strength of the support or resistance zone. Generally, the more times the price declines and retests a support zone, the more likely it is that a breakout will occur. Likewise, the more times the price rises and retests the resistance zone, the more likely it is that a breakout of the upper limit will occur.

We have already talked about how support and resistance work in price action. And what about those types of support and resistance? Let's understand some of them.

Psychological Support and Resistance

The first type we are going to discuss is called psychological support and resistance. These areas are not necessarily related to any technological model, it exists because of humans trying to understand how the world works.

In case you haven’t noticed, we live in an extremely complex world. As a result, we unintentionally try to simplify the world around us in order to understand it better – for example by rounding numbers. Have you ever thought about eating 0.7648 apples? Or buy 13,678,254 rice from the merchant?

A similar effect exists in financial markets. This is especially true for cryptocurrency trading, as it involves units of numbers that are divisible. Buying an asset for $8.0674 and selling it for $9.9765 is treated differently than buying an asset for $8 and selling it for $10. This is why round numbers can act as support or resistance on price charts.

If only things were that simple! This phenomenon has become well known over the years. As a result, some traders may try to "jump first" into areas of obvious psychological support or resistance. In this case, jumping the gun means placing an order outside the expected support or resistance area.

Let’s look at the following example. When DXY approaches 100, some traders will place sell sell orders just below that level to secure a filled sell. Because too many traders expect a reversal at 100, and many jump ahead of that level, the market never reaches that level, but instead reverses before that.

The U.S. Dollar Index (DXY) reverses before hitting 100.

Trend Line Support and Resistance

If you have read our classic chart patterns related Article, you will know that the model can also be an obstacle to price. In the example below, an ascending triangle keeps price in control until it breaks through the upper limit.

Trend lines serve as support and resistance for the S&P 500 Index.

You can take advantage of these patterns and identify areas of support and resistance that coincide with trend lines. This is especially true if you can identify patterns early, before they are fully formed.

Moving Average Support and Resistance

Many indicators may also provide support or resistance when interacting with price resistance.

One of the most straightforward examples is the moving average. Because moving averages can act as support or resistance for prices, many traders use them as a barometer of the overall health of the market. Moving averages can also be of greater use when trying to spot trend reversals or pivot points.

The 200-week moving average serves as support for Bitcoin price.

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Fibonacci Support and Resistance

Fibonacci Retracement The levels described by the tool can also serve as support and resistance.

In the example below, the 61.8% Fibonacci level has acted as support multiple times, while the 23.6% level has acted as resistance.

Fibonacci levels also serve as support for Bitcoin price and resistance.

What is integration in technical analysis?

So far we have looked at what support and resistance are, and some of their different types. But what is the most effective way to build a trading strategy around support and resistance?

The first key concept to understand is fusion. Fusion refers to combining multiple strategies together to form one strategy. Support and resistance levels tend to be most powerful when they fall into more than one of the categories we have discussed.

We use two examples to help understand. Which of the following potential support areas do you think is more likely to actually become support?

Support 1 Matches:

• Previous resistance area
• Important Moving Average
• 61.8% Fibonacci Level
• Price Integer

Support 2Corresponds to:

• Previous resistance area
• Price integer

If you have been paying attention to market trends, you would have guessed that support 1 has a higher chance of holding the price. This speculation could be correct, but the price could also move completely over support 1. The important point here is that support 1 is more likely to act as actual price support than support 2. Having said that, nothing is guaranteed to happen in real trading. While trading patterns can be helpful, past performance is not a guarantee of future performance, so you should be prepared for all possible outcomes.

Historically, combinations determined by multiple strategies and indicators tend to provide the most favorable opportunities. Some successful fusion traders can be very picky about the setups they enter - this often requires patience. However, once they enter a trade, their setups tend to have a higher probability of success.

That said, managing risk and protecting your capital from adverse price movements should always be your first priority. Even a market that seems to have the best entry point may go in the opposite direction. You should consider the possibility of multiple scenarios so you don't fall into false breakouts or bull and bear traps.

Summary

Whether you are day trading or swing trading, when performing technical analysis, you need Understand the basic concepts of support and resistance. Support is the lower limit of price, while resistance is the upper limit of price.

Different forms of support and resistance may exist, some based on the interaction of price and technical indicators. The most reliable support and resistance areas tend to be areas confirmed by multiple strategies.

If you want to know more about chart analysis, please read "12 Popular K-line Chart Patterns Used in Technical Analysis".