4 min read
Did you know that the first traders traded in the financial markets using the strategy of Support and Resistance?
At the time, this was one of the most profitable ways to get the most out of the market. This basic knowledge has been passed on from generation to generation and is still used in different types of technical analysis.
However, we know that everything evolves and trading is no exception, as large investors or funds change their way of trading in order to take money from retailers or small traders. That is why we must know clearly what are the basic concepts of trading to learn how to act in certain situations that may arise.
What is a Support?
Also known as a floor or support, it is the moment when the price reaches an area or price range with strong demand that prevents the price from falling further. For this reason, it is intuitive that the asset we are trading is giving signals to buy.
The more times you touch the price or the area marked as support in the past, the stronger it will be and the harder it will be to break out of it. This is why support has been used as a synonym for buying.
Otherwise, the supports can be broken and the price will not bounce back, which is when it goes from support to price resistance. The ideal is to find out which support or floor is next to be reached, in order to interpret how far the price could fall in the market.
What is a resistance?
If support is synonymous with purchase for obvious reasons, resistance will be synonymous with sales. These are also known as “ceilings” that have the price and like the previous concept the more touches you have in the past will be more difficult to break.
Sometimes, when the demand for the price is so strong and it breaks the last maximum is when it is popularly said that the price has no ceiling, that is to say that it will go “To the Moon“. This expression has gained strength in recent years, mainly in the market of the Cryptos.
Characteristics of the supports and resistances
- A support or resistance will be considered important depending on how many times it has acted effectively in the past. Traders will recognize the strength of a respect zone on the chart.
- Round numbers” are considered good ranges where the price can react, for example 6,000, 10,000 or 15,000 but within them we find important numbers like xx.200, xx.500 and xx.800 (e.g. 10,200, 10,500 or 10,800) giving the trader a little more precision when managing his analysis.
- A broken support becomes a resistance and vice versa. Let’s assume the case that the price of Bitcoin is approaching the resistance of $10,000, when the price is for example at 9,850 the trader can sense:
- a) That the price can respect the 10.000 (maximum resistance) therefore we can think about sales areas.
- b) If the price breaks 10,000 we should wait for a retracement to confirm its upward trend, as it goes from resistance to support.
In order to make better use of the supports and resistance I invite you to know first the historical path of the price, since it will serve you as a first approach to the crypto in question.
If you are interested in learning about crypto trading you are in a good moment, since it is a quite new market, which has not yet been injected by the capitalization that other financial markets have.