Understanding Support, Resistance and Trend Lines
When looking at the chart of an asset for the first time, it’s a good idea to zoom out and digest the complete history of prices the asset has traded at.
You can then easily ascertain the relative performance of the coin in question. Most importantly, you can grasp where the respective highs and lows for an asset lie, if historically it is trading “rather high” or “rather low” in relation to recent prices. Additionally, you’ll be able to deduct areas of “resistance” and “support”.
Although bitcoin’s narrative of “lambo moon” tells us a story of ever increasing prices, in reality there have been numerous periods where price has either oscillated around a specific region or “chewed” at breaking above or below a certain number.
These levels are commonly referred to as “support” or “resistance”, depending on whether the price is above or below these levels. If the current price of a crypto asset is above a region around which the price has traded intensely, we refer to the region as a “support”. If it is trading below the line we label it as a “resistance”.
These lines tell us that around a certain price level a large number of market participants has in the past felt comfortable selling their asset (“resistance”) as it has reached a “high” price or buying the asset as it is historically not likely to become cheaper (“support”). They are mostly applied in the shape of a horizontal line that touches as many closing or opening prices as possible.
With very basic knowledge, one can attempt to make an educated guess whether the price is likely to meet this area again, and, if it does, how it could perform thereafter.
A basic example of a support- and resistance formation can be found in the monthly chart of Bitcoin starting end of 2017.
First, we mark the all-time high from December 2017. A line extended from there (the top end of the wick of the December 2017 candle) will cut through to the present day without touching the price curve. This tells us the price level hasn’t been crossed and thus the line serves as a (weak) resistance.
Then, from the bodies of the December 2017 and January 2018 candles, we draw another parallel line. Notice that the line has a total of five touch points with no interference:
- 1 & 2: represent the upper ends of the December and January candles (price closes below the line, the line is thus a resistance line)
- 3: The upper wick of the June 2019 candle, resistance confirmed
- 4: the close of the October 2020 candle resistance tested
- 5: the opening (lower end) of the November 2020 candle. Finally price breaks the resistance!
If the monthly candle manages to close above this resistance level, the line will “flip” from being a resistance to a support line as we are inching towards the upper green line.
We can apply the same technique to the weekly chart of the same interval and come to different conclusions:
First, we mark the all-time high from December 2017: A line extended from the top end of the wick of last week of 2017. This line “hangs free” until present day and has no further touch point. As the current price trades below this line, it serves as a (weak) resistance.
From the bodies of the candles (last week of December and first week of January), we draw a parallel line. Notice that the line has only three touch points:
- 1 & 2: The upper ends of the Weekly Candles from December / January
- 3: The upper wick of “last week”
This then puts the current price below both of these lines - they are resistance lines.
Interpretation: From looking at both charts, we can infer that:
- short term (weekly), it might be difficult to reach a new all time high very soon (because of two resistance lines above the current price),
- long term (monthly), we face only one resistance line (the ATH), and one support which, if established, could serve as a base for repeated recovery attacks on the ATH
and make an informed decision:
- If you are a short-term investor, you might face the risk of both weekly resistances being confirmed: The price may drop, so you don’t buy.
- If you are a long-term investor, you could proceed with the buy and set a stop-loss at the support.
Get up to speed with the terminology and learn why bitcoin charts are so important in trading in our how to understand a bitcoin chart guide.