Support & Resistance Definition:
Support and resistance are key price levels in technical analysis that help traders understand price behavior. Support is a price level expected to prevent the price from falling further due to increased demand, while resistance is a price level expected to prevent the price from rising further due to increased supply. Detailed explanation: Support: It represents a point or area where traders tend to buy, creating a "floor" for the price. When the price approaches the support level, it often bounces up due to the accumulation of buy orders.
Resistance: It represents a point or area where traders tend to sell, creating a "ceiling" for the price. When the price approaches the resistance level, it often bounces down due to the accumulation of sell orders.
How to identify them: Charts: They are drawn based on the lowest and highest points that the price repeats in the past (like repeated bottoms for support and repeated tops for resistance).
Technical tools: Indicators such as moving averages or trend lines can be used to confirm these levels. Practical example:
In the crypto market, if the price of Bitcoin bounces from around $30,000 several times without dropping further, then $30,000 becomes a support level. If the price rises to $40,000 and stops there several times without exceeding it, then $40,000 becomes a resistance level.
How does the trader benefit?
Entry and exit points: The asset can be bought as it approaches support and sold as it approaches resistance.
Identifying trends: A break of the resistance level may indicate the beginning of a bull market, while a break of support may indicate a bear market.
Placing pending orders: Using buy orders near support or sell orders near resistance.
Risks: If the support or resistance level is strongly broken (with high trading volume), support may turn into resistance and vice versa, requiring reevaluation.
Unexpected news may lead to ignoring these levels. Advice for traders: Ensure to use more than one point to confirm levels (like 2-3 bottoms or tops). Combine support and resistance with other indicators like RSI or MACD for more accurate decisions.
