Support and resistance are two price levels that traders mark on a chart: support is a level where a falling price has often paused or turned up, and resistance is a level where a rising price has often paused or turned down. They are among the oldest tools of technical analysis, the study of past prices and trading volume to judge what might come next. They are best read as zones where buyers or sellers have been active before, not as walls: a level can hold ten times and break on the eleventh.
In brief
- Support is a price area under the current price where buyers have stepped in before, and resistance is an area above it where sellers have stepped in before.
- Traders find these levels from previous highs and lows, round numbers and moving averages, and they usually draw them as zones rather than single lines.
- When a level breaks, many traders expect it to swap roles: broken resistance may act as support, and broken support may act as resistance.
- A study of published levels in currency markets found that prices bounced off them more often than off random levels, but the gap was a few percentage points, not a guarantee.
- A level is a place to plan a trade and its risk, such as where the idea is wrong, and never a promise about what the price will do.
In this article · 12 min read
- Support and resistance: what the two levels mean
- How to find support and resistance levels
- What happens when a level breaks
- Do support and resistance levels work? What the evidence says
- Support and resistance in crypto
- Advantages and limits
- Where this fits: levels, risk and automation
- How to start, step by step
- Checklist before acting on a level
- Who it is for
- Key terms
- Frequently asked questions
- Sources
Support and resistance: what the two levels mean
Fidelity's learning centre, in its guide to support and resistance, describes them as points where the forces of supply and demand meet. Support is the level at which demand is strong enough to stop a price from falling further. The reasoning is that as the price drops towards it, buyers become more willing to buy and sellers less willing to sell. Resistance is the opposite: the level at which supply is strong enough to stop a price from rising, because sellers become more willing to sell as the price climbs.
There is also a human side. Imagine people who bought at a price of 50, watched the price rise to 55, and now say "if it comes back to 50, I will buy more". Others regret not having bought at 50. Many orders then sit around the same price, and that is what a level is. StockCharts' ChartSchool adds that technical analysis is not an exact science, so levels are often drawn as zones to allow for brief dips below or spikes above.
In Lazy Investor, Smart Investor (see the book on Amazon), John Bax lists support and resistance among the five essential concepts of technical analysis, together with Japanese candlesticks, trendlines and moving averages. He describes support as a floor that holds the price up and resistance as a ceiling the price struggles to push through.
How to find support and resistance levels
There is no single correct way to draw levels, which is why two people can mark different ones on the same chart. These are the methods that come up most often, for example in the XTB trading academy:
- Previous highs and lows. Look for places where the price turned at least twice. StockCharts explains that support can be set from earlier reaction lows and resistance from earlier reaction highs. The more times a level has been touched without breaking, the more traders tend to watch it.
- Round numbers. Prices such as 100, 1,000 or 50,000 attract attention because people like to set orders there. In a study of published levels, the economist Carol Osler found that more than 70% of the levels ended in 0 and 96% ended in 0 or 5, far more than chance would give.
- Moving averages. A moving average is the average price over the last number of periods, for example 50 days. Some traders treat popular averages as moving, or dynamic, support and resistance, and John Bax notes that they can act in this way.
- Retracements. After a big move, the price often gives back part of it. Traders mark common fractions of the move, such as 50% or the Fibonacci ratios 38.2% and 61.8%, as possible levels.
- Zones, not lines. Draw a band that covers the wicks and the bodies of the candles around the level. A band of a few percent is easier to defend than a single price.
Our habit, when we mark a chart, is to start on a longer timeframe, such as the weekly or daily chart, and only then zoom in. A level that shows up on a weekly chart is usually noticed by more people than one that exists only on a 5-minute chart.
What happens when a level breaks
A level does not hold for ever. A break below support suggests that sellers have won that round, and a break above resistance suggests that buyers have. Fidelity describes a key idea in technical analysis, called role reversal: when a level is broken, its role flips. Support that is broken can turn into resistance, and resistance that is broken can turn into support. The logic is that people who were left on the wrong side of the move may want to get out at the price where they entered.
| Situation | What traders often read into it | What to keep in mind |
|---|---|---|
| Price bounces from support | Buyers defended the level | It may still break on the next test |
| Price stalls at resistance | Sellers defended the level | A stall is not a reversal |
| Price closes beyond a level with higher volume | A possible breakout | Many breakouts fail and the price returns |
| Broken resistance is retested from above | The old ceiling may act as a new floor | The retest may fail as well |
Volume, the quantity traded, is one of the things traders use to judge a break: a break on high volume is generally taken more seriously than one on thin volume. A single wick through a level that closes back inside it is often called a false break, and it is one reason why many traders wait for a candle to close before they act. If you want to read the candles themselves, see our article on candlestick patterns.
Do support and resistance levels work? What the evidence says
Honestly, the evidence is mixed. One of the few rigorous tests comes from the Federal Reserve Bank of New York. In the July 2000 issue of its Economic Policy Review, the economist Carol Osler published "Support for Resistance: Technical Analysis and Intraday Exchange Rates". She tested the support and resistance levels that six foreign exchange firms sent to their customers between 1996 and 1998, using one-minute exchange rates for the German mark, the Japanese yen and the British pound.
The result: exchange rates bounced off arbitrary levels 56.2% of the time on average, and off the published levels 60.8% of the time. The published levels did better in all sixteen firm and currency pairs, and the predictive power seemed to last at least five business days after the levels were first sent out. The study also reports that between 25% and 30% of foreign exchange traders base most of their trades on technical signals.
Read these numbers with care. The gap is about four to five percentage points, the data come from currency markets in the late 1990s and not from crypto, and a bounce is not the same as a profitable trade after costs. Even so, the study supports a modest claim: levels that many people watch can influence prices a little.
Trading on short-term signals is hard for most people. In a press release dated 27 March 2018, the European Securities and Markets Authority (ESMA) reported that between 74% and 89% of retail accounts typically lose money on contracts for difference (CFDs), which are leveraged products. CFDs are not the same as buying crypto on a spot market, but the figure shows how often people lose when they trade frequently.
Support and Resistance: Look for Pools of Money (Joe Rabil, StockCharts TV) (in English)
Support and resistance in crypto
Crypto trades around the clock and is often more volatile than stocks, so levels can be crossed quickly and in the middle of the night. Liquidity also matters. John Bax makes this point in Lazy Investor, Smart Investor: large coins such as Bitcoin and Ethereum, with high trading volumes, tend to form more consistent price patterns, so chart reading carries more meaning there, while small and thinly traded altcoins move erratically and a chart tells you little about them. For those, he points to a different approach based on blockchain data, called on-chain analysis.
John Bax's view
In the book, John Bax describes a simple support and resistance approach for short-term traders: look for a clear level where buyers have stepped in before, consider buying near it, and put the stop loss just below it, so that a break shows the idea was wrong. He treats a break below support as an area where stop-loss orders belong. He is also frank that day trading is hard for people who do not want to follow charts all day, and that a good setup still fails if the position size and the stops are not respected. Our article on stop loss and take profit shows how to place them.
Advantages and limits
What levels do well
- A shared map. Many traders look at the same obvious levels, so they give you a common language and places to plan.
- A natural place for the stop loss. A level tells you where the idea stops making sense, so you can measure the risk before you enter.
- Simple to learn. You need only a chart and a few minutes to start marking previous highs and lows.
Where they fall short
- Subjectivity. Two people can draw different levels, and levels are often easy to see only after the fact.
- Breaks and false breaks. Prices pass through levels, sometimes by a little and then back.
- Weak on thin markets. On small, illiquid coins, a level can be moved by one large order.
- Risk. Trading at levels without a plan can lose money quickly, especially with leverage, which multiplies losses as well as gains.
Where this fits: levels, risk and automation
Levels become more useful when they are part of a written plan: where you would enter, where you would be wrong, and how much you are willing to lose. Our article on risk management in trading explains how to size a position from the distance to the stop loss, and the one on limit orders and market orders shows how to place an order at a level without chasing the price. To test a rule such as "buy near support, stop below it", write it down exactly and run it on past data, as we describe in our guide to backtesting a strategy.
Our guide to the crypto trading bot explains how automated trading works. Crypto Go Bot, which we built, trades your own Kraken account with rules decided in advance, so it does not depend on a person drawing a line in the moment. Trading always carries risk, and past results do not guarantee future ones.
How to start, step by step
- Open a daily chart of a liquid asset, such as Bitcoin, on your exchange or on a charting site.
- Mark the obvious turning points of the last few months: the two or three highs and lows that you can see at a glance.
- Turn lines into zones by drawing a band around each level.
- Watch, do not trade. For a few weeks, note what the price does when it reaches a zone: bounce, stall or break.
- Write the plan before you act: where you would enter, where the idea is wrong, and how much you would lose if it is.
- Test the rule on past data, then, if you go further, use an amount you can afford to lose.
Checklist before acting on a level
- I have drawn a zone, not a single price, and I have checked it on a longer timeframe.
- I know whether the price is bouncing, stalling or breaking, and I have waited for a candle to close.
- I know where my stop loss goes and how much I lose if it is hit.
- I am not using leverage I do not understand.
- The amount is one I can afford to lose, because crypto is volatile and past results do not guarantee future ones.
Who it is for
Support and resistance help anyone who looks at a price chart, in different ways.
- Beginner opening a chart for the first time: marking a few previous highs and lows turns a confusing line into something you can describe, as long as you treat levels as zones and not as promises.
- Long-term holder who buys in instalments: weekly levels can show where the price has paused before, which may help you stay calm, provided you do not turn it into frequent trading.
- Active trader who plans entries and exits: levels give you a place for the stop loss and the target, with a written plan and a limit on how much to risk per trade.
- User of an automated tool: understanding levels helps you read why a rule enters or exits where it does, even if you never trade by hand.
Key terms
- Support: a price area below the current price where buyers have stepped in before.
- Resistance: a price area above the current price where sellers have stepped in before.
- Breakout: a move of the price beyond a support or resistance level.
- False break: a move through a level that quickly returns back inside it.
- Role reversal: the idea that a broken support can act as resistance, and a broken resistance as support.
- Technical analysis: the study of past prices and volume to judge what may come next.
Frequently asked questions
What are support and resistance in trading?
Support is a price area where a falling price has often paused or turned up, and resistance is an area where a rising price has often paused or turned down. Traders use them to plan entries, exits and stop losses.
How do you find support and resistance levels?
Start with previous highs and lows on a daily or weekly chart, then add round numbers and moving averages. Draw each level as a zone, not as a single line.
What happens when support or resistance breaks?
A break suggests that one side has overcome the other. Many traders expect the broken level to swap roles, so a broken resistance may act as support, but the retest can fail.
Do support and resistance levels work in crypto?
Sometimes, but there is no guarantee. Levels tend to say more on liquid coins such as Bitcoin and Ethereum than on thinly traded altcoins, and the research available is mostly from other markets.
Which timeframe is best for support and resistance?
Longer timeframes, such as the daily and weekly charts, produce levels that more people notice and that have less noise. Shorter charts are easier to break by chance.
Are support and resistance reliable on their own?
No. A study of published levels in currency markets found that prices bounced off them 60.8% of the time against 56.2% for arbitrary levels, which is better than chance but far from certain. Levels work best as one input in a plan with a stop loss.
Can I automate a support and resistance strategy?
Yes, if you can write the rule precisely: how a level is defined, where you enter, where the stop loss goes and how large the position is. Test it on past data first, and remember that past results do not guarantee future ones.
Sources
- Osler, Support for Resistance: Technical Analysis and Intraday Exchange Rates, Federal Reserve Bank of New York Economic Policy Review, July 2000
- Fidelity, Support and resistance
- StockCharts ChartSchool, Support & Resistance
- XTB, Support and Resistance
- ESMA, ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors, 27 March 2018
- StockCharts TV, Support and Resistance: Look for Pools of Money
- Wikipedia, Support and resistance
