How to find support and resistance levels

Today, the local maximum and minimum definition is one of the easiest methods of market analysis. The level of Bitcoin support allows you to determine favorable trading points within chosen time frames. In a nutshell:

1. Support and resistance levels are used at short time intervals, as well as to determine the key price.

2. The tool is not used during the period of “volatility news” or when influenced by  fundamental factors.

3. The use of support levels is impractical with extremely small time frames since local extremes can turn out to be “volatile noise”.

Note: Like any other method, the determination of support levels is used for market analysis, but not to predict a further price. When approaching a local minimum/maximum, there is always a possibility of its breakout with the subsequent continuation pattern.

Psychological factor

Before proceeding to details of the technical component of support and resistance levels, you should remember the analysis’s physiological basis.

Any patterns and models reflected on the chart are a result of the activity of other traders. This allows you to analyse market movements based on similar previous data. Thus, based on how buyers/sellers behaved in a similar situation before, traders then try to predict further price movement.

The pitfall of technical analysis is that tens of thousands of other traders use them, which (in the absence of a large player) makes them more stable.

What are Levels?

Bitcoin support and resistance levels, as well as other assets, are the points of balance between the pressure from one group of traders (bulls) and the opposing group (bears).

Bitcoin support level is a price at which more people want to buy an asset than those who want to sell it. In this case, upon reaching a certain mark, a reversal with a rebound occurs.

A support level is a place on the chart where more people want to sell bitcoins (take profits) than those who want to buy them.

Breakthrough means that the price (usually round), which was considered psychologically attractive by the traders, was swept away by the opposite group’s pressure.

What you should take into account: when conducting trading operations via the terminal and focusing on rigid trading channels, try to set flexible losses, as slippage by several points is possible which can lead to a loss and a remaining unclosed position in the future.

How do levels appear on the chart?

Resistance points on the chart appear like a local trend reversal point. Usually, they coincide with a decrease in trading volume. Tested minimums and maximums look like a wide-tailed bar at low volumes.

The point itself is not “a level”, and therefore, it is possible to speak about stable support/resistance only if the chart reaches the “channel” price several times.

What is Trend Strength?

Trend Strength is a set of indicators showing this trend’s duration, volatility, and stability.

There are three types of trends: ascending, descending, and lateral. Analysing the local extremes in combination with the trading volume, allows you to determine the direction of the trend in combination with its strength.

If we observe a regular breakout of the market resistance on large volumes, the upper border of the channel is redrawn. When the trend stops breaking through, it goes into a sideways (flat) phase and moves within this channel, running into the points.

Note: In case of a serious breakout, the support level on strong trends later becomes a resistance level since a large number of players entered, exactly at this price.

Extreme levels

Extremes are necessary to determine the movement channel and identify the main support and resistance levels.

Extreme is a horizontal line drawn along the chart according to specified criteria:

1. Time frame.

2. Points of a trend reversal.

In order to determine the channels, you need to take a chart at a specified time interval and draw perpendicular lines relative to the key pivot points.

The lower border of the candle determines support levels. If the resulting line turns out to be straight, it is flat. If it has a slope, it is a trend movement. The continuation of these lines shows the following support levels in an uptrend.

Non-minimums are considered to draw resistance, and then you should draw lines along them.

If the trader sees a descending triangle after drawing at the local minimums and maximums, this may indicate a narrowing of the trend volatility. A breakout of the triangle may also indicate a formation of the new trend.

Round numbers

Round numbers are not a panacea, but, unlike the extremes built, they allow you to predict the price movement in a new range. Usually, they are combined with other numbers, for example, Fibonacci.

The magic of round numbers and the technical analysis, in general, are based on psychology. With long and stable work in the channel, traders form ideas about an ideal price. Usually, running into this price, they close the deals, fearing a rebound (as “the price is too high/low”). If you pay attention to the quotes with a large number of decimal places, most of the extremes are formed around round numbers during a flat.

When a round number is broken through, there is serious movement with possible slippage and an increase in the chart’s amplitude. Round numbers are also called “psychological price levels”.

False breakout/bounce

Based on this analysis, traders will face a big pitfall associated with strong trends. This is a false level rebound on a strong trend. It is distinguished by a large amplitude of movement and is usually called “a market correction”.

Market correction often occurs because of the closing of positions by a number of traders which include:

1. Fixing the result.

2. Minimisation of loss.

3. Automatic closing.

What might it look like? Let’s say you see a downtrend trying to break a round number. However, upon reaching this number, the volume of transactions increases several times, which results in a large rebound. If there was no slippage, a rebound means the forced closing of positions at the current price. This creates oncoming traffic.

The trading volume usually determines the difference between a false breakout and a channel return. If the volume of deals falls, instead of growing before the approach of the key level, the price is likely to return to the channel. If a rebound occurred with an abnormal change in the volumes of the closed deals, then it is most likely false, or a correction takes place.

The same applies to the breakout. A false breakout is best seen by the large “shanks” of the Japanese candlesticks, after which the price returns to its original position.

Determination of levels by indicators

With high market volatility with small timeframes, noise may appear, which a trader can interpret as a false support level. In this case, indicators allow you to cut off row noise and form more stable patterns.

Working by “levels”, indicators based on moving averages are suitable for profitable trading.

If the middle line coincides with the extreme points, this is a sign that the support level was chosen correctly, and trading will continue on the same channel.

With a steady trend, you can use Fibonacci indicators, allowing for rebuilding the rapidly changing points and setting a channel price range.

If you trade using the resistance level, pay attention to the following indicators:

• Alligator

• Fibonacci

• Bollinger Bands

• Different types of moving averages (adaptive, exponential, smoothed, etc.)

Trading strategy with support and resistance levels

The main trading strategy in the analysis using support and resistance for cryptocurrencies is  intra-channel trading. The trader determines the key points in advance and they can then consider the slope of a trend line (if it is not flat) and trades within the established price.

This is called “range-bound trading”. How does it work? Let’s say there is strong resistance at the key mark, which does not break through the extreme for at least three periods. So, we can assume that the next time after reaching this mark, the price will bounce again. In this case, the purchase of an asset is determined when the asset approaches this price.

After that, the position is closed after a rebound at a price comfortable for the trader. The perfect option is to determine the key positions and hold them until the rebound from the reverse side. This is a more complex strategy, which is called “following the trend”. Its advantage lies in the fact that you can make a huge profit without closing the position when the upper limit is broken through.

If the forecast was incorrect (breakout at the start of the trade operation), it is better to fix the loss and determine a new range immediately.

Pros and cons

Pros of the analysis according to the described method are as follows:

1. Versatility. The tool can be combined with almost any existing indicator.

2. The most popular strategy, “following the trend,” is based on this tool.

3. It is easy to build and understand for beginners.

Cons include the following:

1. Time of reduced trading activity. For example, when trading takes place on small volumes, any breakouts and setbacks are possible, as one strong player can overcome market resistance.

2. Stable flat. It is better to use this tool only to determine the side channel because frequent false breaks are possible.

3. It is impossible to use during fundamental movement factors.

4. High subjectivity of results.

Conclusion

Trading performance is a subjective concept. This tool allows you to determine the channels of trend movement and their reversal fairly accurately. However, the trader has been and remains to be the main problem while using this tool.

Since it is possible to choose any time frame, everyone can draw their own lines. Therefore, to reduce the subjectivity of results, it is recommended that traders use extra tools to confirm or deny the “prediction” of quotes.

In general, almost the entire technical analysis is based on patterns with support and resistance levels. The main patterns, leverages, triangles, and derivatives, are built exactly on drawing levels and analysing the resulting figures.

Whether one uses them or not, is up to the individual trader, but understanding their workings will help in better understanding market movements.

Disclaimer

Trading activity is associated with high risk. Remember that none of the technical analysis methods provide a 100% guarantee of a correct forecast. Trade only with the money that you can afford to lose. Remember the importance of money management, and do not violate the trading strategy you have built.