Lesson 7: Support and Resistance Levels

Jun 29, 2018

Hello Traders,

After being busy with work and all, I am finally back with yet another lesson. There are many traders out there who still do not understand the significance of support and resistance levels. So today we are going to go over that in detail. Note that this lesson will be only covering the horizontal support and resistance levels. I will have another lesson for the diagonal support levels later on.

This concept has been used by a lot of traders to mark price levels and borders for a price to prevent it from pushing it any further, or to even manipulate the price. You must be thinking that support and resistance is as simple as drawing a line where the price has touched more than a few times, but let me tell you it is not as easy as it looks. There are different ways to draw the support levels, and you will understand them all in this lesson which I am very sure about. So lets begin.

First, lets look at the topics I will be covering in this lesson:

1. What is support?
2. Where is support found?
3. What is resistance?
4. Where is resistance found?
5. Methods to draw support and resistance levels?


1. What is support?
In simple words, a support is formed when a price has been in a downtrend because of an increase in the supply, and suddenly we see an increase in demand due to which the price bounces upwards from the current trend. This increase in demand (if strong enough) stops the price from moving further down. It is considered a strong support level if the price has bounced from the same price/zone level several time in the past depending on the time frame you use.

In the image below we can see how a strong support level is formed on the 4H chart for BTC:


2. Where is support found?
Unlike the above image where the price is currently trending near the support level, support is usually found below the current price. Note that it is best to draw multiple support levels, because support levels are not always reliable. Having a support level doesn't mean that the price cannot go further down, which is why drawing multiple support levels helps as when price breaks one support level, it is very much likely to go touch the next support level below. Lets look at an image below where you can see TRX currently trending where the blue line is, and the red line is indicating the next support level. If the price goes on to break the first support level at 592, it is likely to go to the next support level at 490. However, it can also be a trade opportunity at the first support levels, if the price bounces at that support level.



See the image very carefully. Now, if the price goes below the 592 support level, that level will start acting as a resistance level when the price climbs its way up. We will go over that in detail.


Continue reading below....

Jun 29, 2018

Note

3. What is resistance?
A resistance is formed when a price has been in an uptrend because of an increase of demand, and suddenly the demand decreases, and the supply increases due to which the price starts heading down from the current price. Due to the decrease of demand which you can say volume, traders usually start selling, and which in turn stops the price from going upwards from that point. A resistance level is formed if the price has pulled back from the same price/zone level several times in the past depending on the time frame you use. I hope this is simple in terms of words for you to understand. Make sure you do.

In the image below. we can see a resistance level, and how the price pulls back from that price level because of decrease in volume:


You can clearly see from the image above how the resistance level is so strong that the price fails to break it and go upwards. In order to do that, it needs a sudden volume increase. Traders mentality here is that they have bought it at a lower price, but most traders have their sell orders ready near the resistance level so in order to break that level, demand needs to rise.

4. Where is resistance found?
Resistance is found above the current price. Once the price crosses the resistance, it acts as a support level. Again as I mentioned in the support topic, it is best to have multiple resistance levels, as once the price breaks and holds above the first resistance level, it is likely to reach the next resistance level. For an example lets look at the above image again:



Here as you can see the current price is trending at 426, and once the price starts going upwards, the next strong resistance would be 469. I said strong resistance because there can be a few resistance before that which will not be strong enough to not let the price go further upwards. We will look at some examples in detail once we reach to the example section, but I want to make sure you are understanding the basics perfectly first. It is pretty straight forward.

Continue reading below....

Jun 29, 2018

Note

5. Methods to draw support and resistance levels:

In this section we will learn the different ways to establish the support and resistance levels.
Below are the methods we are going to look in this section:
a. Horizontal channel
b. Previous reaction highs/lows
c. Support & Resistance Zones

Now lets study them in detail:

a. Horizontal channel Method:
This is when a price fluctuates between a price range. Horizontal Channel method gives you a strong support and resistance levels when a price moves between the channel. In such cases, wherever the price breaks out from the channel (up or below), that is the winning side. Let us take a look at an example below:


In the above image, we can clearly see how BTC is moving in the blue channel. It has bounce back from the support and also the resistance several times. Now, the last time it breaks the support line and see how it drops to the floor. This can be one of the strong methods we will be learning today. Always keep an eye out for such scenarios. Make sure you get this method right. Try looking for the same pattern in other coins. Do your research. If you need any help you can comment below, or reach out to me in PM. Lets move on to the next method now.

b. Previous reaction high/lows:
This method basically includes drawing the support/resistance lines based on the historical reaction highs/lows. We can get support levels from previous reaction lows, and similarly we can get resistance levels from previous reaction highs. This is very similar to the previous channel pattern that we learn. Lets take the same example:


Here, lets start from the first support point. Every time the price has touched the support, it has touched the resistance line. The key here is to find a pattern that has this occurring more than two times. In the above image, we can only see this happening two times, but in a stable coins it is more likely to happen more than twice. That is when we can know how strong the support/resistance levels are. For a reaction low, there is a reaction high on the support/resistance levels for this pattern to be valid. This is pretty much similar to the previous pattern that we learn, however, this is more towards the behavior of the pattern rather than the price, when the previous method focused more on the price moving in a specified way. This one is a bit confusing, but I tried to be clear enough. The above image doesn't give a clear picture of this method as the pattern only repeats twice, but when it repeats more than 2 times, thats when this pattern is strong enough. It is rare to find though.


c. Support & Resistance Zones:

Since we cannot do an exact TA on any coin, it is best to have support & resistance zones instead of a single horizontal support/resistance level. This clearly depends on how the price is moving. Sometimes, if you can find a perfect reaction lows/highs, it is best to have a support/resistance level instead of zone. But, if you are not able to connect the previous reaction high/lows to an exact line, it is best to have a support/reaction zone. Usually, I prefer support/resistance zones for a longer timeframe, however for the shorter times frame exact support and resistance levels are best suited.

We will take a look at separate examples of support zones and resistance zone.

Lets look at support zones first below:


In the chart above, we can see that we have support levels are three different price range. The first support is at around 494, the second support is at around 502, and the third support is at around 510. In this case, it is very hard to draw an exact support level, so which is why we have a support zone. As long as the price stays within the zone, we consider the buy (for support) and sell (for resistance) as valid.

Continue reading below....

Jun 29, 2018

Note

Now lets take a look at the resistance zone:


As you can see in the above chart, the resistance zone is above the current price level. Here we see that there are two resistance levels, one at 616, and the other at 625. It is very hard to get the exact resistance level, which is why it is better to have a resistance zone. We can consider selling as valid as long as the price moves in the zone. I prefer just moving my stop loss up accordingly rather than selling at this level. This is very simple to understand. I hope you got this part. Please feel free to ask questions if you are stuck. I am always here to help.


Extra Tips:

Another simple trading method is to simply just draw out all the support and resistance levels at once like how I have done in the below example chart, and just follow the price accordingly. You move your stop losses or put your buy orders according to that too.


This way you have more idea of the strong and also the weak support levels.

It is very important to identify the support and resistance levels for a coin. It can really improve your trading techniques and make you more efficient and accurate. Basically when a price nears your support level/zone, you can be aware that a possible reversal might happen and can place your buy order accordingly. Similarly, you can be extra careful if you have the resistance levels up on the chart, and you can plan out your exit in a better way once the price hits your resistance levels.

Remember if the price breaks a support level, it then acts as a resistance level, and you have the next support level as your support. Similarly, when a price breaks a resistance level, that level acts as a support.

Another thing to keep in mind is that when the price is in a horizontal channel, and then it breaks the resistance line, it can be consider as a breakout.



These were some important methods, and patterns that we should keep in mind while trading in our daily life related to the support and resistance levels. I hope this lesson was helpful for y'all. If you have any lesson requests, please feel free to request it here and I will make sure to do it.

Hope these lessons improve your trading techniques, and really improve one as a trader.

Again, feel free to ask me questions if you have a doubt. I am always here to help.

Happy Trading!

Jun 29, 2018

Note

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