The terms Support and Resistance in technical analysis refer to certain price levels acting as barriers, preventing the price from going lower or higher, respectively.
Support plays a role of a price floor and Resistance - price ceiling. That means, at those price levels, probabilities of a pause or a trend reversal are higher than elsewhere. Those higher probabilities occur due to the concentration of demand or supply:
- At the Support Level, the price has declined sufficiently to cause the demand to concentrate (because the lower the price, the higher the demand.) Relatively more demand may lead to some struggle between the sellers and the buyers, or a price pause, and to a possible upward price bounce.
- At the Resistance Level, the price has increased sufficiently to cause the supply to concentrate (the higher the price, the higher the supply). Relatively more supply may start shifting the power from the buyers to the sellers and eventually make the price turn downward.
Support and Resistance are often used as levels for position entries, however, a pause or a trend reversal are just probabilities. And the price may break through them. A broken Support becomes a Resistance and vise versa.
Support and Resistance are not cut in stone. A chart may bounce against a certain level multiple times but may also pierce through other levels on strong volumes.
The more times a certain level is tested (price touches it) without breaking, the stronger support or resistance it is considered to be.
You should not treat Support and Resistance as exact numbers. Instead, there are zones of support and zones of resistance.
The following can be used to determine and plot Support and Resistance on your chart:
- Horizontal price levels where the price historically tends to rebound;
Use Price Lines in CEX.IO Broker’s charting tools to draw support and resistance lines on your charts.
- Trendline price channels, indicating a corridor of the price movement;
Use Trend Lines or Trend Channels in CEX.IO Broker to draw support and resistance lines on your charts.
- Even prices (like BTC price $8,000) as psychologically significant levels;
Note that even prices can be more granular than thousands for Bitcoin. The levels of support and resistance can be found whenever a price nears every $100 or $50. Notably, the prices like $6,666 or $8,888 can present significant barriers. The reason those “barriers” form is because most of the people prefer to place their orders at even prices (or good-looking prices), concentrating supply or demand there.
Price Lines in CEX.IO Broker are helpful to mark possible support and resistance at “psychological” price levels.
- Moving Averages as a smoothed trend-following indicator;
For example, if a price breaks through the SMA50 upward - a significant bullish signal - the moving average can then become tough support. Breaking it downwards would not look good for an asset.
In CEX.IO Broker, you can plot Simple Moving Averages and Exponential Moving Averages of any duration.
- Price levels determined by other indicators (Bollinger Bands, Ichimoku Cloud, Fibonacci retracements).
These indicators determine certain price levels where support or resistance might form. When one level is broken through, the support or the resistance move to the next one. For example, Fibonacci retracements (shown on the image above) represent price levels, in percentages, between a significant high and a significant low. The prices seem to “hesitate” breaking through those levels.
CEX.IO Broker has the most popular technical analysis indicators built-in. You can plot the ones you need by choosing them out of the available “studies” (a flack icon above the price chart) in the trading terminal.