Support And Resistance A Complete Guide

Does it ever happen to you that just after you buy your trade goes a few points in your direction and it completely turns opposite and hits your stoploss quickly. If so then you might have bought on resistance.

After this guide you will never make these mistakes again!

What is Support and Resistance?¶
Support and Resistance are the important levels that form when a large amount of buying or selling happens on some particular levels. Generally these are levels where previous swing highs or swing Low’s are formed. They are not the exact values like 3525.23 but they are like the range of values 2525 to 2540.

You can easily get good risk to reward trades around these Support and Resistance levels. For most chart patterns you will always find using Support and Resistance at the core.

In short

* Support: Area of Buying Pressure
* Resistance: Area of Selling Pressure

Let’s take some examples.

From the above image you can clearly see that previous two swing low’s act as support level and price gets rejected from this level forming a hammer candlestick pattern. Similarly here those previous swing high’s are acting as resistance levels. Here you can also check that a range of values are acting as resistance not the exact value

Why do Support and Resistance act as important levels?¶
Now the question is why these levels are important and the answer lies in demand and supply.

At support levels demand rises and more buyers get interested to buy that asset because it can be the cheapest price at which they can buy. This makes prices quickly jump from support. If you see price testing support again and again then demand is diminishing and buyers are not interested in that level. This makes support more likely to break down and that asset enters a bearish phase.

Similarly at resistance supply rises and buyers are not interested to buy at that level because it can be expensive for them and they are most likely to book their profits around these levels. This makes the price quickly reject that level and the price starts falling. If price starts consolidating around resistance then it means that resistance got weaker and price might break out of that level.

> Note: When support breaks it starts acting like resistance and when resistance breaks it acts like support. This is very important concept and can easily give you very good risk to reward reversal trades

Types of Support and Resistance levels:¶
1. Big round numbers¶
Generally big round numbers like multiples 10, 100 or thousands (depending on asset price – for 13$ stock 10$, 15$ and 20$ can be a big round number while for 1000$ stock 1100$, 1200$ or 1500$ might be a big round number) and they acts as good levels. This is because most of the traders keep these numbers in their mind as targets to book profit or add significant buy positions.

How many times have you heard a large number of people saying that Bitcoin will reach 65,000 levels or they will start accumulating at 30,000 levels.

Let’s see in an example

Strong Resistance in Bitcoin at exact level

2. Moving averages¶
Indicators like Moving averages also offer support and resistance to the price of an asset. One question that is often asked is what period of moving average works well. Generally it depends on whether you are a trader or an investor. Traders generally use 20 and 50 period moving averages while investors use 100 or 200 period moving averages.

Suppose for a good fundamental stock if it reaches 200 moving average then a large amount of investors starts accumulating that stock creating strong demand hence making support for that asset. For traders they use these moving averages to identify trend and use them in confluence with their other strategies

Strong Support from 200-MA in Daily Timeframe

3.Trendlines¶
Trendlines are formed when a series of higher low’s or a series of lower high’s are formed . They work great for both traders and investors and also acts as support or resistance for an asset. They are found on every timeframe. In Technical analysis some chart patterns like Triangles, wedges etc use trendlines but the concept is the same.

Trendline acting as strong support

Best Timeframe for Support and Resistance¶
Support and Resistance generally works best for higher time frames. The lower the timeframe the lower importance it gets. Reason for this is because higher timeframe levels attract the eyes of a large number of traders.

If you compare hourly support with daily support then obviously more action happens around daily support. So if you are trading lower time frames then also draw Support Resistance levels of higher time frames.

Best support and resistance strategy¶
1. Volume Breakout and breakdowns¶
One very popular strategy to trade using support and resistance is trading breakouts of resistance and breakdown of support. However most breakout and breakdowns generally fail. Breakout failure happens when there is very less volume in breakout candles indicating that Buyers are not interested in buying at higher prices.

But when it works it can give you a very good trade with great risk to reward. However you can increase your probability of catching good breakouts by looking for simply one criteria. Price must consolidate near support or resistance first for some time before giving a breakout or breakdown with very good volume supporting it. Just by using this one criteria as a filter you will be able to avoid most of the breakout failures.

Also never trade breakout where price is coming directly to break support or resistance as it needs more built up in the form of consolidation around the level to make price push more in the direction of breakout.

Resistance Breakout with very good Volume

2. Rejections or traps or false breakout breakdown¶
As most of the breakouts fail we can also build a strategy around this price action. Here risk to reward is not very high but you can get some very good trades with good accuracy. What we generally do is wait for price to break support or resistance then after breakout candle close we look for rejection type of candles like hammer or Bullish engulfing on support or Shooting star, Bearish engulfing on resistance. Then we can clearly use the high or low of these candles to trade these reversals.

This strategy works because during breakout many traders build long positions by placing very small stoploss. But when rejection happens and prices reverses it starts hitting stop losses of all these trades and new traders start adding positions for reversal trades this makes price moves fast in opposite direction.

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Shooting star rejection from Resistance