Introduction

In technical analysis, resistance levels (also known as resistance zones) and support levels are core concepts. Learning how to identify these price zones and understanding their functions for beginner traders can significantly improve trading success rates. This article will guide you step by step, starting with the basics of candlestick charts, teaching you how to draw support and resistance lines and use these key price levels in trading.

The Nature of the Trading Market

In financial markets, price movements are fundamentally driven by supply and demand. When buyers are stronger than sellers, prices rise; when sellers dominate, prices fall. Every trade in the market is a battle between buyers and sellers, and the core of technical analysis is to use historical price data to predict future market behavior.

Psychological Factors Behind Support and Resistance Levels

In both the stock and crypto markets, support and resistance levels are not just price markers but also reflect the psychology of market participants.

1) Market Memory and Group Behavior: Traders make decisions based on past experiences. If a price repeatedly bounces at a certain level, that level becomes a support zone; if it repeatedly declines, it becomes a resistance zone. People rely on past experiences, making specific price areas key points of interest.

2) Fear and Greed: At support levels, traders fear missing out and buy in; at resistance levels, they fear losing profits and sell, causing prices to fluctuate within these zones. Market sentiment fluctuations reinforce the significance of support and resistance areas.

3) Anchoring Effect: Investors use historical highs and lows as reference points. Historical highs tend to become resistance levels, while lows act as support levels. This psychological effect leads to high trading volumes near key historical price points, influencing buying and selling decisions.

4) Stop-Loss and Take-Profit Orders: Many automated trading orders are concentrated around support and resistance levels. When triggered, they amplify price movements, leading to sharp breakouts or crashes.

5) Self-Fulfilling Prophecy: When most traders believe a price level is important, their collective actions make it truly significant. This consensus among traders often drives the market price in the expected direction.

6) Trading Volume and Trend Momentum Indicators: When prices approach support or resistance levels, changes in trading volume provide clues about market sentiment. Increasing volume indicates the growing importance of a price zone, while declining volume suggests a wait-and-see market attitude.

Basic Understanding of Candlestick Charts

A candlestick chart (also known as a K-line chart) is a commonly used chart type in technical analysis that visually represents price movements over a specific period. Each candlestick consists of four main elements:

• Opening Price (Open): The first traded price within the given period.
• Closing Price (Close): The last traded price within the given period.
• Highest Price (High): The highest traded price within the given period.
• Lowest Price (Low): The lowest traded price within the given period.

The color of a candlestick typically indicates price movement:

• Bullish Candlestick (usually green or white): The closing price is higher than the opening price, indicating a price increase.
• Bearish Candlestick (usually red or black): The closing price is lower than the opening price, indicating a price decrease.

The following image illustrates the basic structure of a candlestick:

Source: gate.io

Related content: Gate Learn > What is a K-line Chart

In this chart, the body represents the range between the opening and closing prices, while the upper and lower wicks indicate the highest and lowest prices within the period. By analyzing candlestick patterns, traders can quickly grasp market momentum and the balance between bullish and bearish forces, enabling them to make more informed trading decisions.

Support and Resistance Levels

In financial trading, support and resistance levels are fundamental concepts in technical analysis. Understanding and applying these concepts can help analyze price trends and make informed trading decisions.

Importance of Support and Resistance Levels in Trading

• Determining entry and exit points: Traders may consider buying near support levels, expecting a price rebound, and selling near resistance levels, anticipating a price decline.
• Identifying trends: A price break below a support level may signal the start of a downtrend, while a breakout above a resistance level may indicate the continuation of an uptrend.
• Setting stop-loss and take-profit levels: To effectively manage risk and returns, traders can place stop-loss orders below support levels and take-profit orders above resistance levels.

What is a Support Level?

A support level is a price zone where buying pressure increases during a price decline. Investors may perceive the asset as undervalued when the price reaches this area and increase buying activity, preventing further price drops. This buying force creates a “support” effect.

Support levels are typically difficult to break because of strong buyer demand. Increased buying often leads to a price rebound when the price reaches support, making it a potential buying opportunity.

What is a Resistance Level?

A resistance level is a price zone where selling pressure increases during a price rise. When the price reaches this area, investors may view the asset as overvalued and increase selling activity, preventing further price increases. This selling force creates a “resistance” effect.

Resistance levels are usually hard to break due to strong selling pressure. When the price reaches resistance, increased selling often leads to a price retracement, making it a potential selling opportunity.

How to Identify Support and Resistance Levels?

Common methods for identifying support and resistance levels include:

• Observing historical price trends:
  By examining historical price movements, look for areas where the price has repeatedly touched but failed to break through. These zones often represent strong buying or selling interest and could form support or resistance levels. If a price level is tested multiple times over different periods without breaking, it may indicate a strong resistance (pressure) or strong support level.

• Trendlines: Connecting two or more significant highs or lows forms an upward or downward trendline, which can act as dynamic support or resistance.

• Trading volume: When significant trading volume occurs at certain price levels, it indicates strong buying or selling interest in that region, potentially creating support or resistance.
• Technical indicators: Indicators like moving averages (MA) and Fibonacci retracement levels can offer support or resistance at specific price levels.

How to Identify Support and Resistance Levels from the BTC Chart

Using this BTC daily candlestick chart as an example, I will apply the abovementioned methods to identify the support and resistance levels and analyze the price movements step by step.

BTC daily candlestick chart example (Source: TradingView)

1. From Historical Price Trends

Method Explanation: Historical prices that have tested a certain range multiple times without breaking through often form support (Support) or resistance (Resistance) levels.

Key price zones observed on the chart:

• Resistance:
  • $99,000 - $100,000 (Resistance 1): The price has tested this area multiple times but has faced selling pressure and failed to break through, representing short-term resistance.
  • Around $110,000 (Resistance 2): This range includes the recent high, and if BTC strengthens again, it may face new resistance here. If the price breaks through $100,000, it will further challenge $110,000.
• Support:
  • $94,000 - $95,000 (Support 1): The low in this range has been tested multiple times and bounced back, historically acting as strong support. When the price retraces to this range, it indicates strong buying power.
  • $89,000 - $90,000 (Support 2): This is a long-term key support zone. After multiple tests, the price did not fall further, showing that this area has support.

Conclusion: Continue observing around $96,000, as this may be a smaller support zone, where the price has bounced back after staying there a few times. If the price breaks $100,000, this resistance may turn into support. If the price drops below $94,000, the next key support zone will be $89,000 - $90,000.

2. From Trading Volume

Method Explanation: When a certain price zone experiences high trading volume, it indicates strong market reactions, which may become support or resistance.

Trading volume distribution observed on the chart:

• High-volume zone (Support):
  • $94,000 - $95,000 (Support 1): This range has significant trading volume, indicating strong buying interest in this area.
  • $89,000 - $90,000 is also a strong volume zone. If the price drops below this range, there may be greater selling pressure.
• High-volume zone (Resistance):
  • $99,000 - $100,000: This range has significant selling pressure, and the market requires strong momentum to break through.

Conclusion: From the volume change, we can observe that when the price approaches the resistance zone but the trading volume decreases, it usually means that a breakout is less likely. If the price drops to $94,000 with increasing volume, it may be a buying opportunity. However, if the price breaks $100,000 with rising volume, it may form a new upward trend.

3. From Moving Averages (MA)

Method Explanation: Moving averages (MA) often serve as dynamic support or resistance. Common moving averages include 50MA, 100MA, and 200MA.

Support and resistance levels from moving averages observed on the chart:

• Support (MA):
  • 50MA ($99,024): A strong short-term support. If the price holds this level, it may bounce back.
  • 100EMA ($94,068): Medium-term support. If the price retraces to this level and bounces back, the upward trend remains intact.
  • 200MA ($85,363): Long-term support. If the price breaks the 100MA, it may test the 200MA.
• Resistance (MA):
  • The price is currently hovering around the 50MA. If it drops below this moving average, it may test the 100MA ($94,068).

Conclusion: In the short term, the 50MA is the first support level. If it breaks below, the price may test the 100MA. If the price rises, it must break through $100,000 to confirm a new upward trend.

What are MA (Moving Average) and EMA (Exponential Moving Average)? What’s the difference?

In technical analysis, MA (Moving Average) and EMA (Exponential Moving Average) are two common types of moving average indicators. Their main difference lies in the calculation method and their sensitivity to price changes.

MA (Moving Average) is the average of the closing prices over the past n days, forming a smooth line over time. EMA (Exponential Moving Average) is a type of moving average that is more sensitive to recent price changes, giving higher weight to recent prices, allowing the moving average to react more quickly to market movements.

MA reacts slower to market changes than EMA, so it is more suitable for observing long-term trends and determining support and resistance levels, as prices often bounce or face resistance near the MA line. 5MA, 10MA, and 20MA are usually used for short-term trading, 50MA and 100MA are suitable for swing trading, while 200MA is used for long-term investments to confirm the long-term market trend.

EMA reacts faster to price changes and is more easily influenced by sharp price fluctuations. While it can detect market trends earlier, it is more suitable for short-term traders, but it can also produce false signals. 9EMA, 12EMA, and 20EMA are used for short-term trading, such as the 12EMA and 26EMA indicators in MACD. 50EMA and 100EMA are long-term moving averages suitable for trend-following trades and are medium-term moving averages. 200EMA is used for long-term trades to confirm the overall market direction.

4. From the trendline perspective

The current price is still above the rising trendline, indicating that 94,000-95,000 is an effective trend support. If the price breaks below this trendline, it may test the next support around 89,000-91,000.

Conclusion

From the charts above, including historical prices and trading volume, we can conclude that 94,000-95,000 is a key short-term support area based on historical prices and trendlines. The trading volume indicates that 100,000 is a short-term resistance area, and to break through this level, higher trading volume support is needed. The 50MA currently represents short-term resistance, and the 100EMA is key support.

How to Draw Support Lines, Resistance Lines, and Trend Lines

As shown in the chart, first, circle all the lowest and highest points. Connecting multiple low points that have not been broken for a long time will form a support line. However, we usually make this line slightly thicker to form a support zone, as marked in my chart as Support Level 1 and Support Level 2. On the other hand, the resistance line and resistance zone are formed by connecting the recent highest points, as marked in my chart as Resistance Level 1 and Resistance Level 2.

The drawing method for trendlines and support/resistance lines is similar. In the current chart, starting from the low points at 88,909 or 90,200, the two clear lower positions recently, connect these low points with the subsequent higher lows (Higher Low) at 91,130 and 93,321. The straight line extending upward from these points is an effective “upward trendline.” The trendline you draw will slope upward to the right, and it is generally recommended to use green or blue to represent “support.”

Note that in my chart, there are two trendlines, Trendline 1 (fluorescent pink) and Trendline 2 (fluorescent green). Trendline 1 starts from the low point at 90,200 and connects to the subsequent low points, but the price later significantly broke below (e.g., the low at 88,909), meaning this trendline might have become invalid.

Trendline 2 (fluorescent green) starts from the low point at 88,909 and connects to the recent 91,130 and 93,321. This line has not been clearly broken yet, so it is relatively valid and can serve as the main support reference for the current market.

BTC Trendline Daily Chart Example (Source: Tradingview)

How to use an upward trendline?

It is usually considered a buying opportunity when the price falls near the trendline and does not break below it. If the price breaks below the trendline, it indicates that the market may experience a trend reversal or weakening, and special attention is needed.

Common Support and Resistance Patterns

In technical analysis, support and resistance lines can present different patterns. Understanding these patterns enhances the precision of market trend analysis and trading opportunities. This section will focus on three common patterns: Head and Shoulders, Double Top and Double Bottom, and Triangle patterns.

What is the Neckline?

The Neckline is an important horizontal or trendline used in technical analysis to confirm price pattern breakouts and trend reversals. It typically appears in classic patterns such as Head and Shoulders, Double Top, and Double Bottom, serving as a key support or resistance line.

The function of the Neckline

The main function of the neckline is to help traders determine whether a price has truly formed a trend reversal or a continuation:

1. Neckline as Support Line
   • In Head and Shoulders Top and Double Top patterns, the neckline acts as a support level.
   • When the price breaks below the neckline, it is usually seen as a confirmation of a trend reversal, signaling that the market may enter a bearish trend.
2. Neckline as Resistance Line
   • In Inverse Head and Shoulders and Double Bottom patterns, the neckline acts as a resistance level.
   • When the price breaks above the neckline, it is usually seen as a confirmation of a trend reversal, signaling that the market may enter a bullish trend.

Head and Shoulders Pattern

The Head and Shoulders pattern is a reversal pattern that indicates a trend may change from up to down (Head and Shoulders Top) or from down to up (Inverse Head and Shoulders). The pattern consists of three peaks (or valleys), with the middle peak (or valley) being the highest (or lowest), and the two peaks (or valleys) on the sides being lower (or higher), forming the shape of a “head” and “shoulders.” When the price breaks the “Neckline,” it usually signals the occurrence of a trend reversal.

BTC Head and Shoulders Pattern, Daily K-line chart example (Source: TradingView)

Double Tops and Double Bottoms Patterns

Double Top and Double Bottom patterns are also common reversal patterns. The Double Top pattern appears in an uptrend, where the price touches a similar high point twice but fails to break through, forming an “M” shape, indicating the price may decline. The Double Bottom pattern appears in a downtrend, where the price touches a similar low point twice but fails to continue falling, forming a “W” shape, indicating the price may rise.

Double Top Pattern

The Double Top pattern usually appears at the end of an uptrend and is a clear bearish reversal pattern, suggesting the market may shift from a bullish to a bearish trend.

BTC Double Bottom Pattern, 4-hour K-line chart example (Source: TradingView)

Double Bottom Pattern

The Double Bottom pattern usually appears at the end of a downtrend and is a clear bullish reversal pattern, suggesting the market may shift from a bearish to a bullish trend.

BTC Triangle Pattern, 4-hour K-line chart example (Source: TradingView)

Triangle Patterns

Triangle patterns are continuation patterns, indicating that the market is consolidating, and a breakout may continue the original trend. Common triangle patterns include:

Ascending Triangle

The ascending triangle is a bullish pattern where the price’s highs remain near the same horizontal resistance level, while the lows gradually rise, forming an ascending trendline.

BTC Ascending Triangle Pattern, 4-hour K-line chart example (Source: TradingView)

Descending Triangle

The descending triangle is a bearish pattern where the price’s lows remain near the same horizontal support level while the highs gradually decrease, forming a descending trendline.

BTC Descending Triangle Pattern, 4-hour K-line chart example (Source: TradingView)

Symmetrical Triangle

A symmetrical triangle is a neutral consolidation pattern, where the price’s highs gradually decrease and lows gradually increase, eventually converging to form a triangle shape. A symmetrical triangle indicates that the market’s buyers and sellers are evenly matched, and the direction is unclear. Therefore, it is important to wait for a clear breakout signal. Once a breakout occurs, it usually suggests that the trend will continue or reverse quickly. Traders can then trade in the direction of the breakout.

BTC Symmetrical Triangle Pattern, 4-hour K-line chart example (Source: TradingView)

How to Use Support and Resistance Lines for Trading

In trading, support lines and resistance lines are key indicators for identifying entry and exit points. This section provides three common trading strategies that traders commonly use, which can effectively increase the probability of successful trades and reduce the risk of misjudgment. However, these strategies are not investment advice but only provided for learning reference. Always conduct your own research before making trading decisions.

Strategy 1: Buy at Support Line, Sell at Resistance Line (Range Trading)

When the market is in a range-bound consolidation, prices typically fluctuate between specific support and resistance levels. In this case, buy to go long when the price approaches the support line and shows a reversal signal (such as a long lower shadow candlestick, MACD or RSI divergence, or strengthening).

Alternatively, when the price approaches the resistance line and shows signs of a slowdown (such as a long upper shadow candlestick, indicator divergence, or weakening), sell to go short or take profits.

However, this strategy requires confirmation that the support or resistance is valid. If the price breaks through the support or resistance level, it is no longer valid, and the strategy should not be used. Further observation is needed, and strict stop-loss orders should be set. Exit if the support is broken, or stop-loss if the resistance is breached.

Strategy 2: Breakout Trading

When the market trend is clear and the price breaks through a support or resistance line, if the price breaks above the resistance line accompanied by a significant increase in volume, it is considered a bullish signal to enter long. Conversely, if the price breaks below the support line with a volume increase, it is a bearish signal to enter short.

This strategy requires distinguishing between valid and false breakouts. A valid breakout is usually accompanied by a significant increase in volume, as seen in the earlier BTC example charts. Some experienced traders may use a pullback (price retracing back to support or resistance) to enter again after the breakout to increase reliability.

Strategy 3: Trendline Trading

When a price forms an ascending or descending trendline:

Ascending Trendline (Support Line): When the price falls back to near the trendline, buy and set the stop-loss just below the trendline. The take-profit target can be set at a recent high or resistance level. If the price clearly breaks below the trendline with increased volume, it indicates that the trend may weaken or reverse, and the trader should exit and wait.

Descending Trendline (Resistance Line): When the price rebounds near the trendline, sell or short, setting the stop-loss above the trendline. If the price breaks above the trendline with increased volume, it indicates a potential trend reversal, and the short position should be closed.

When using trendline trading strategies, it is important to confirm that the trendline has touched at least three points for stronger validity.

Final Reminders for Traders

1. Support and resistance are not absolute. Any support or resistance line can be breached, so risk management is essential. Always set strict stop-loss orders for each trade.

2. Do not rely on a single tool. Combine support and resistance lines with other indicators (such as volume, trend indicators like MACD, RSI, etc.) for cross-validation to effectively reduce the impact of false signals.

3. Trend is a trader’s best friend. Whenever possible, trade with the trend in the early stages. While counter-trend trading can sometimes bring substantial profits, it carries higher risks. Beginners should prioritize trading with the trend to reduce the chances of mistakes.

4. Maintain discipline and control emotions. Discipline is key in trading. Do not let fear or greed affect your trading plan. Documenting the reasons for your trades, entry and exit points, and the results is helpful. After trading, review the trades to build a habit of continuous