A Guide to Horizontal Support and Resistance
Price movements can seem like a random and unpredictable thing in the cryptocurrency world. Cryptocurrency has became one of the most volatile asset-classes to ever be traded so it is important that you use every tool at your disposal to try to give you the edge! In our recent guides, we’ve covered how candles form on a chart as well as common candle patterns that form in cryptocurrency. Today I will be covering another easy to use Technical Analysis technique that you can easily start implementing in your daily charting: Horizontal Levels of Support and Resistance!
The picture above is an example of what is known as a Trading Range; a period of time where price movement has consolidated between a support level and a resistance level. If you were to trade this range, you would want to place your buy bids on or around the bottom red line and your sells on or around the top red line.
The top red horizontal line indicates a price level that is commonly sold into which causes the price to drop down below it, in other words it is a price level that the market resists crossing. Because of this, you can expect the top of the trading range to form around this common level of resistance, assuming that price doesn’t pump and simply shoot through the resistance and out of the current trading range. It is important that you view resistance lines not as precise measurements but rather as “zones” of resistance. This means that the slight crossing of the line indicated by the “sell here” circle shouldn’t be considered a break in the resistance level even though the line was crossed. Since price fell shortly after crossing the line instead of continuing upwards the resistance level still held up, and should still be considered valid despite being crossed. Price also does not necessarily need to directly touch your line in order to validate it. This is indicated by the dip in price furthest to the right on the chart; the candle wicks came close to touching the resistance line but stopped short of it since, once again, this line is actually a “zone of resistance” and not a precise line that will be clearly touched every time.
The bottom red line in the chart example indicates a price level where buyers continually enter the market at, which causes the price to rise. In other words, this is a price level that the market is in support of since there is frequently enough traders buying in at this point to cause the price to reverse and pump up. Just like with resistance lines, you should view support lines not as precise measurements but as “zones of support” where the price is likely to be reversed and pump back up. This means that the candles within the “buy here” circles still respected the support zone, even though they crossed the red line.
Even when a horizontal support or resistance zone is fully broken, it doesn’t mean that the line is completely useless! You should always leave your lines/zones on the chart in order to look for reversals. Often times whenever a resistance line is fully crossed it will “flip” over and become a support zone! The same thing happens whenever price dips below a support line! You should never remove lines from your chart until enough time has passed that you can be certain that the price has fully moved away from the zone and made it irrelevant. Another important factor to consider when drawing your support and resistance levels is that each consecutive touch on the level will typically make the level weaker. For example, the support level shown in the example above held strong for the first test of the line but the second touch dipped a little lower before fully reversing since many buyers had already had their bids filled at the previous touch. Because of this trend, it is better to look for more recent support levels than it is to extend old lines in the hopes that the range will remain the same.
