Support and resistance in trading: how to spot them

A support is a zone where the price stops falling and bounces. A resistance is a zone where it stops rising and turns around. The first rule he gives is this:

• A support that breaks becomes resistance.
• A resistance that breaks becomes support.

Everything else builds on this idea.

• With one touch you can’t draw anything: you don’t know if the line is flat, rising or falling. At most it’s a possible resistance, and you’ll probably have to correct it.
• With two touches you can draw the line, but it could still be a coincidence.
• With three touches you can treat it as practically confirmed.

“Two points can be a coincidence, three points are not a coincidence.”

A line isn’t final. As the price comes back to the zone, you adjust it so it runs where the price actually reacts.

On the weekly bitcoin chart he shows two examples from the same period:

• A flat support around $5,900-6,000, where the price bounced hard several times. When it finally broke it, the price kept falling.
• A descending resistance, a line sloping downward that the price touched four times, and all four times it was pushed back down.

Both are drawn the same way: you look for the points where the price reacts and connect them.

Some supports and resistances can be anticipated before the price gets there: round numbers. $5,000, $10,000, $20,000, $50,000 or $100,000. Lots of people place their sell orders there to take profits, and that’s why the level slows the price down.

His example is the 2017 bitcoin high: the resistance was at $20,000 and the price stopped just short, around $19,700, before it started to fall.

And he adds a nuance worth remembering: near an important level, the price usually does one of two things. It either stops a little before, or overshoots a little to liquidate whoever was sitting right on the line.

The same logic applies on the minute, hourly, daily or weekly chart.

When the price moves back and forth between a support and a resistance, he explains two ways to trade it.

Inside the range. You buy near support and sell near resistance. But always with a stop loss, because at some point the price will break out of the range. If you buy, the stop goes at least below the previous low.

Waiting for the breakout and retest. This is the way he considers best:

1. You wait for the price to break the level.
2. You wait for it to touch it again from the other side. That’s the retest.
3. If the level holds in its new role, that’s the entry. A broken support that now stops the price as resistance confirms the move down. A broken resistance that now holds it up as support confirms the move up.

• The more times in a row a level is touched, the weaker it gets. He compares it to punching a table: hit it enough times and you end up breaking it.
• A resistance that has held through many touches is a strong resistance. When it finally gives way, it usually turns into an equally strong support.
• The more vertical a trendline is, the sooner it breaks. Very steep rallies don’t usually last. Flatter lines hold for longer.

It’s the question he gets asked the most. His answer: both options are valid, and each trader uses one. What matters is staying consistent within the same drawing: “connect wicks with wicks, don’t connect wicks with bodies.” And the same goes for bodies.

• If you use wicks, keep in mind that lower timeframes have a lot of false movement.
• If in doubt, go with the line that has more touches. In his example, one way of drawing the zone gave only two touches and the other gave seven before the breakout.

Marking the level correctly is half the job. The other half is how much you risk if it fails. If you’re going to buy on a support, the stop goes below it, with some margin. Enter your entry and that stop in the position size calculator, along with your capital and what you’re willing to lose. It will tell you what size to open so that, if the support breaks, the loss doesn’t exceed your limit.

How to set that limit is explained in the guide where to place the stop loss and take profit.

• Accepting a level with one or two touches. Until the third, it could be a coincidence.
• Mixing wicks and bodies on the same line. Pick one way of drawing and stick to it for the whole line.
• Trading inside a range without a stop loss. Every range breaks sooner or later.
• Getting in as soon as the price breaks out, without waiting for the retest that confirms the role switch.
• Expecting the price to hit the round number exactly. It often stops a little before or goes a little past it.
• Trusting a very steep trendline. Those are the ones that break first.