Class 101: An introduction to the support and resistance zones on the price chart

Are you a trader taking your first steps into the stormy crypto world on your own?

If so, then one of the first things you must master in order to master your trading skills is identifying levels of support and resistance.

Imagine a ball bouncing up and down in front of you. There are two barriers that limit the pitch and low of the ball – your ceiling and your floor. In financial trading, the same limits that impede price movements are known as support (Support) and resist (Resistance).

Such trading restrictions can have a profound effect on the value of an asset as price movements tend to repeat their history. If an investor views a price as the ideal entry or exit point, it will likely continue to act as a price limit until certain conditions are met.

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Support zone – support

For example, buyers typically buy at a certain price until their demand is completely absorbed by the market. Assuming that we buy at price X and then the market price rises and then falls back to previous levels, the buyer will want to protect the price from falling below X, or at least increasing its position.

New buyers will again find that the price has so far refused to drop below X, making this a good position to enter the market. The concentration of buying pressure helped prevent prices from falling further and created a temporary floor called “support”.

Resistance – Resistance

Conversely, if an asset is considered overvalued above a certain threshold, sellers will certainly take advantage of this opportunity. This is where the above buyers find a place to exit the market and take profits. There are also investors who sell short and accumulate, putting pressure on the market to sell.

Similar to the case of buying pressure just mentioned, the concentration of selling pressure leads to the price acting as a barrier there, but this time instead of a price floor it becomes a price floor “resistance zone”.

Horizontal support and resistance

The main, but also most recognizable, type of resistance support zone is the horizontal lines that are the result of consecutive periods of price being pushed back / supported to a certain level.

Horizontal support or resistance lines can be identified simply by connecting price peaks or troughs as in the following example.

In the upper half of the price chart, selling on the XMR / BTC market continuously pushed the price down from the 0.00451 BTC area, making it clear that this is a tough resistance zone.

In the lower half of the chart, continued buying prevented the $ 0.17 XLM / USD pair from beating, indicating that this is a solid area of ​​support.

It can be seen that in both cases traders have continuously exploited signals of support / resistance to make buy or sell decisions, and since everyone understands this common “implicit”, the price is not kicked down or up by the respective support Resistance range.

Polarity – polarity

So what happens when these levels collapse?

As mentioned earlier, support and resistance areas can still be broken if selling or buying pressure is completely absorbed by the market. At this point there will be a major shift in investor sentiment, a situation commonly known as polarity.

Why is it called “reverse polarity”? Because as soon as the selling pressure has completely vanished behind a resistance level, it is no longer viewed as the optimal level for profit-taking, but as a logical entry point for buyers to convert resistance into support from there.

On the contrary, when buying pressure is past a support level, it becomes a new area of ​​resistance when investors are no longer interested in entering buy orders at that level.

The important point is that a breakout of a major level of support is often viewed as a negative signal as prices will continue to fall until sales momentum subsides. The next investor retreat to take profits or try to identify the bottom will help create a new temporary support area.

And also a breakout is a very good signal and the price will continue to rise from there until the next level of resistance is reached.

The graph above shows the impact of a pole reversal on the XMR / USD price once the 0.00451 / BTC resistance is broken. You can see that the area that previously acted as a solid resistance zone often discouraged the price and was forced to reverse, weakening on each test, and then finally giving up before the price spike.

XMR price then rebounded dramatically as the resistance was broken, causing a shift in market sentiment. And in the immediate correction, the price fell back into its new support zone where it used to be the strategic resistance – and that is the whole point of the pole reversal.

Summary

Price action often breaks as it approaches support or resistance levels as this is where selling or buying pressure is concentrated. While these areas are often the place to contain price movement for a while, they are not as sustainable as mature as sooner or later the market has to go up or down.

As soon as this happens, the polarity reversal occurs, turning resistance into support and vice versa.

In short, the support and resistance levels help investors identify where there is high demand and supply. Therefore, the ability to read and identify key areas of support and resistance is considered to be one of the most important aspects to participate in the trading market.