Spotting resistance and support levels are some of the most important skills to learn as a beginner in trading. This lesson will teach you what resistance and support levels are, how they work and why they are so essential.
After this lesson, you will know how to buy floors (temporary minimum) and sell ceilings (temporary maximum) and as such, grow your probability of making profitable trades.
Read the following lessons for more beginner trading knowledge:
- What is an order book?
- Understanding different types of orders
- Scalp trading versus swing trading
- What are the different account types on Huobi Global?
Resistance and support are horizontal levels you can use in technical analysis. They inform you of where the mass of traders is buying and selling a particular token. Sometimes, you can even easily tell from a chart that there are the precise levels at which the price falls or rises and then bounces or retraces immediately on multiple occasions.
The resistance level is the sell wall at the top where traders are selling their tokens (using active limit orders). Every time the price of a token reaches this level, the sell orders are triggered and the price is pushed downwards.
On the other hand, the support level refers to the “wall” of buyers who have their orders at a specific bottom price to indicate they are willing to buy if the price drops to that level.
Why use resistance and support levels?
Spotting resistance and support levels will give your trading activity structure. For example, once you know how the resistance level functions, it’s clear where to set stop-loss orders and earn profits. They eliminate the tendency to buy and sell at random prices as you can obtain information from the price chart to indicate probable future price movement.
Resistance levels help you understand that you should buy on support and sell on resistance to maximize profit or minimize loss on each trade. In addition, this strategy prevents you from FOMO buying and selling.
How to spot resistance and support levels
There are three different times to enter a market — when the price is going sideways, upwards or downwards. Let’s assess these times with resistance and support levels in mind.
1. Sideways market
In a sideways market, the token price remains within resistance and support levels, not breaking through either of the prices. The levels tend to be strong, so the price keep will bouncing between the resistance and support levels.
You can see from the image below how the price retraces from the top of 2680.00 (resistance), bounces from 2660 (bottom) and continues to move in this manner.
2. Upward market
Nevertheless, one of the abovementioned support and resistance levels will eventually break. If the price breaks through the resistance level, it will trend towards the next level. Every time this happens, resistance becomes support. So if a price goes over the resistance level and touches it again, thereby confirming it, the level becomes the new support level.
In the image below, you will see that the first resistance level is at 2695.00 USDT.
To maintain the uptrend, the price must break through that resistance level before returning to test the previous high and make it the new support level. Every time the price breaks through resistance, it must return to the previous high to make it the new support level. You may have already heard traders talking about “turning resistance into support”.
After the token has new support, it can aim for the next resistance level. In the same image, the next resistance level is at 2705.00 USDT. Again, to make it the new support level, the price must go above it and then return to test it.
When the price is trending upwards, you’ll probably hear traders talking about higher highs and higher lows. This comes from the idea that the support and resistance levels will constantly rise for the next level but never break through the above levels.
3. Downward market
The price usually tests the support level in the downward market and then breaks through to the downside.
In the image below, to keep up the downtrend, the price must break through the resistance to below the 2704.00 USDT level and then come back to test the previous floor to make it the new support level — every time the price breaks through resistance, it needs to return to the previous low to make it the new support level. You may have already heard traders talking about “support into resistance”, or “turning the floor into a ceiling”.
After the token has new support and resistance, it can start moving towards the next resistance support level. In the image, the next resistance level is at 2692.00 USDT. Again, to reach this level, the price must go below it and then return to test it to make it the resistance level.
In the down market, traders speak about lower highs and lower lows, as the support and resistance levels are constantly going down and not breaking above levels.
Remember that you learn through practice. After learning about resistance and support, the next step could be to go to the Huobi Global trading interface and start charting. You can view the price movements and use simple lines to find different patterns.