Support and resistance
Supports and resistances are two technical analysis tools used to diagram and measure the price trend of a market, trying to predict possible future trends. Since they are particularly valuable tools for interpreting the state of an asset and its outlook, support and resistance indicators are mainly used for online trading and cryptocurrency trading.
The support indicator, as the name suggests, is used to indicate the horizontal level on the chart around which the fall in the price of an asset stops and below which the price is unlikely to fall. Once the level is reached, the trend generally rebounds upwards again.
Support, metaphorically speaking, can be associated with a floor. When we throw a ball towards the ground, the ground will block its fall, causing it to bounce back up again.
The other side of the coin is represented by the resistance indicator. In a market where the trend is bullish, i.e. tends to go upwards, resistance is the horizontal level of the chart around which the price is unlikely to go up, and therefore stops its rise. Think of resistance as a ceiling: if we throw the ball upwards, this will prevent it from rising further.
When an asset approaches a support or resistance level, it can essentially behave in three distinct ways.
The market can experience a rebound: the price fails to break the support or resistance line, thus reversing its trend. The more a support or resistance level is confirmed by price signals or spikes, the higher the probability of observing another change of direction at these levels.
When the price crosses the line of support and resistance, we can instead speak of a breakout, as referred to in technical analysis. Depending on the market under analysis, breakouts are important bullish or bearish signals.
On the other hand, if the price of the asset remains constant, thus neither crossing nor falling away from support or resistance, we are speaking instead of a signal or stationary behaviour.
Identifying supports and resistances during the technical analysis of a market is quite simple. It can be done for all charts of any asset and in all time horizons: daily, weekly, monthly. In any case, it is good to keep in mind that the longer the time horizon, the more significant the support and resistance analysis will be.
By drawing two lines, one at the support level and one at the resistance level, it is possible to have a more indicative graphical representation of the market trend. If the line drawn is horizontal (i.e. the support and resistance indicators are more or less stable), the asset will present a more or less constant trend over time.
An oblique line, on the other hand, refers to more dynamic support and resistance levels. This can be synonymous with a possible trend change within the market.