Support and Resistance Levels: What Are They and Why Are They Needed?

Have a look at this diagram. 

When the price moves up and down, the highest point it reaches is called resistance, and the lowest point it reaches is called support. Support and resistance are not exact numbers. When the price moves up or down, depending on a trend, support and resistance levels are formed constantly.

What is support?

Support is the level at which demand is strong enough to prevent the price from falling lower. However, support doesn’t always hold. A price break below the support level means that bears won. It means that buyers are not willing to buy an asset, and sellers are willing to sell it at a price lower than normal.

Once a support level is broken, another support level will be established at a lower level.

A support level is normally established below the current price of the asset. However, crypto prices are volatile, and it often happens that the price briefly dips below the support level.

Such a dip does not always mean that the support level is broken. For example, a dip of a tenth below the support level can hardly be considered as a support level broken. Or we may think that the support level is broken, but soon, it becomes apparent that the market was just testing it. 

These tests are represented by candlestick shadows.

Shadows are formed when the candles break lower than the support level, but in the end, they close above it.

What is resistance?

Resistance is the level at which the supply is high enough to prevent the price from moving up. Sellers are more willing to sell, but buyers are less willing to buy the asset. 

Resistance doesn’t always hold. When the asset price breaks above the resistance level, it means that bulls have won.

Once the current resistance level is broken, another resistance will be established at a higher level.

Crypto prices are volatile that’s why it is common for an asset to be traded close to the resistance level or even rise above it for a short time. However, if the price goes above the resistance level for a short time, we cannot consider the resistance level broken. In such a case, we say that the market tested a resistance zone. These tests are represented by candlestick shadows, just like in the case of the support level.

Support vs Resistance

Support can turn into resistance and vice versa. When the price breaks below the current support level, this support level can turn into resistance, and a new support level will be formed.

On the other hand, resistance can also turn into support when the price breaks the current resistance level.

Bottom line

The ability to determine where the support and resistance levels are is important for a successful technical analysis. If the asset price is approaching one of these levels, it can serve as an alert to look for signs of the increase of buying pressure (support) or selling pressure (resistance) and a potential market reversal.