What Are Support and Resistance Levels and How to Determine Them?

A support level represents the lowest price point over a specific time interval that prevents the asset's price from decreasing further. This is essentially a region on the chart bustling with numerous buyer orders. 

On the other hand, a resistance level indicates the highest price that hampers the asset's further growth. In our article, we will delve into the technique of identifying this crucial analytical tool on the chart, and scrutinize the myriad forms of support and resistance levels. We will also enlighten you on the effective usage of this tool in cryptocurrency analysis.

An overview of support and resistance levels

Support and resistance levels typically serve as the initial indicators when performing a technical analysis of cryptocurrencies. Here's an overview of their core features:

● Establishing a support or resistance level requires the identification of at least two minimum or maximum price points. The strength of the price level can be gauged from the number of touch points; the greater the number, the more robust the level.

● These levels are depicted on the chart as horizontal lines, line segments, or by employing the “rectangle” tool.

● The probability of the asset rebounding increases once its price hits a support or resistance level.

Identifying the support level based on price lows. Source: tradingview.com

Identifying the resistance level based on price highs. Source: tradingview.com

What if determining a level proves challenging?

Identifying a precise support or resistance level can be challenging as prices often bounce off multiple price markers. This makes it impractical to designate the level with a single horizontal line.

In such cases, support or resistance is better understood as a price range, commonly referred to as a ‘zone'. Visually, this is represented as a rectangle that encompasses all potential highs and lows. By focusing on these zones, traders can reduce the risk of inaccurate analysis and consider a broader range of price levels that may trigger responses from buyers or sellers, rather than relying solely on isolated numerical values.

Identifying the support level via the zone method. Source: tradingview.com

Identifying the resistance level via the zone method. Source: tradingview.com

Using horizontal volume as a supplementary tool

Sometimes, the movement of an asset can be extremely volatile, creating a profusion of highs and lows on the chart. This volatility can lead to excessively broad support and resistance zones that aren't practically usable for trading.

A horizontal trading volume is a beneficial tool that can pinpoint strong price levels with greater precision. To make use of this, you need to select a certain segment of the chart and overlay the “Fixed Volume Profile” tool. This action will illustrate the price level that witnessed the majority of cryptocurrency trades. This particular price marker often functions as a key support or resistance level.

Identifying a resistance level with the help of horizontal trade volume. Source: tradingview.com

How to use levels in trading?

In hands-on trading, robust price levels typically suggest the potential emergence of two trading scenarios:

● Bounce off a level. After testing a support or resistance level, an asset may bounce back in the opposite direction;

● Breaching a level. When the price breaks through a support or resistance level, it indicates a significant shift in market dynamics. The asset is expected to continue moving towards the next level, where a reaction from buyers or sellers is anticipated.

Final words

Support and resistance levels serve as crucial components of technical analysis, assisting in determining an asset's price lows and highs. However, it's often more effective to use this indicator in conjunction with other aspects of chart analysis such as trade volume (both horizontal and vertical), candlestick patterns, geometric shapes, trend lines, and oscillators.