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The Support and Resistance are levels where the price stops, usually with a lot of trading volume, and continues with a movement contrary to what it had been doing, that is:

Support: the level at which the price stops its fall to rise again.

Resistance: the level at which the price stops rising to start its fall.

The main difference between support and resistance is in the direction of price. The more times the price has performed that behavior at these levels, the “easier” it will be to predict the price movement in the future.

This is added to the fact that support and resistance levels are considered psychological levels; that is, traders tend to buy or sell at those points, which helps to strengthen them.

What is the use of identifying support and resistance?

1. To project the direction that the price will take

The price will tend to move between support and resistance, slow down when approaching one of these and, sometimes, bounce when it arrives and cannot cross the barrier.

2. To determine where to place your stop loss

If we know that the safety stop has to be placed where we do not expect the price to arrive, it makes sense that we place it below and/or above the support or resistance.

For example, if we go long, we will put a safety stop at some point below the current price. If we place our stop just below the nearest support, we will be placing it in an area where it will be hit with a very low probability. In other words, only when we have made a mistake with the direction of the price in such a way that it has been able to pierce the support will our stop loss be triggered.

3. To know how far we have to wait before entering a position

It is always good to wait for the price to approach its local low. Sooner or later, the price will come with significant support, and you will have the opportunity to buy cheap.

4. To recognize channel breakouts and be prepared for any price breakout

It is common for the price to shoot out after a channel breakout. If you have marked your supports and resistances well, you will know precisely when the price leaves the channel, and you will be able to anticipate it by placing conditional entry orders just outside the channel.

How to calculate support and resistance?

Now we will focus on looking at the chart to locate the support and resistance that the price has found and is likely to find.

To detect support and resistance on a chart, we must take into account the following aspects:

  • In general, support and resistance are nothing more than “hard” levels where the price chart advances with more incredible difficulty and where, due to this, the price sometimes bounces and changes its course.
  • The easiest way to locate support/resistance is to look for levels where price stops or rebounds. Support and resistance are not always determined by a very defined price. Sometimes, they are more like price bands.
  • Regarding the relevance of support and resistance, it increases the more price rebounds they have and the longer the time frame to which they belong. That is, support is more relevant if it is seen on a weekly chart than if it is only found on a 10-minute chart. Furthermore, any support or resistance seen in a higher time frame also affects any of its lower ones.

Here are some examples of support and resistance on the weekly Bitcoin chart:

Supports

Resistances

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Disclaimer: This article is for educational purposes only and must not be treated as financial advice.

As always, please conduct due diligence and manage your risks accordingly.