Trading 101: What Are Support And Resistance?

Support and resistance levels are areas of particularly significant activity, where an asset's price may reverse.

Trading 101: What Are Support And Resistance?

Support and resistance (S/R) levels are one of the most important concepts in technical analysis. These levels are used by traders to identify potential prices at which a financial asset—whether a stock, currency pair, commodity, or crypto—is likely to encounter buying or selling pressure. By understanding where these levels lie, traders can increase their chances of making profitable trades.

Identifying Support And Resistance

Support refers to a price level at which buying interest is strong enough to halt or reverse a downtrend in the price of an asset. It acts as a floor, preventing the price from declining further.

When the price approaches a support level, there tends to be increased buying activity, which can lead to a rebound in price. Support levels are often identified by connecting multiple lows or previous price levels where buying pressure has been significant in the past.

Similarly, Resistance is a price level at which selling pressure has been particularly strong in the past. As the price of the asset rises to this level, resistance may become significant enough to stop or reverse an uptrend. It acts as a ceiling, preventing the price from rising further. When the price approaches a resistance level, traders anticipate increased selling activity, potentially causing the price to reverse or consolidate.

TradingView chart for bitcoin
The $28,000-30,000 zone has seen high volumes of trading at multiple points over the past two years, making this a key support/resistance area for bitcoin.

When price overcomes a key resistance level, it will often "retest" it as support. In the example above, when BTC moves above the $30,000 level, it may drop back to that point as traders check whether there really is buying pressure there. (If not, then the "breakout" is really a "fakeout".)

Using Support And Resistance In Trading

Support and resistance levels can provide traders with valuable information for making trading decisions. When the price breaks above a resistance level, it may indicate a bullish signal, suggesting that the price could continue to rise. Conversely, when the price breaks below a support level, it may indicate a bearish signal, suggesting that the price could continue to decline. Traders often use support and resistance levels in conjunction with other technical indicators to confirm potential trading opportunities and manage risk by setting stop-loss levels or profit targets.

It is important to note that support and resistance levels are not fixed or guaranteed to hold indefinitely. Market dynamics can change, and prices may break through these levels, leading to new support or resistance levels forming. However, support and resistance provide useful information about areas that are particularly important for price action.

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