Trading with Support and Resistance Zones

In the last lesson on support and resistance, we saw zones that did not break. They held firm because they were strong.

Sometimes, support and resistance areas are not strong enough to stop prices from moving in a certain direction. When prices go beyond these support and resistance areas, we say those levels have been broken. This is why traders use stop-loss orders when dealing with these levels, just in case they do not hold and prices continue in the opposite direction.

The critical question is what occurs when these areas are breached, and prices clear these technical barriers.

The answer is that when these technical levels are broken they then change from one to the other - what this means is that:

Once a support level is breached, it transforms into a resistance zone: conversely, a broken resistance area becomes a new support zone.

These concepts are presented using the illustrations shown:

Broken Support Turns Resistance: Key Price Shift

In the example, support held twice but failed on the third test. Sellers drove prices below that level.

Trading BTCUSD Price Charts with Support Resistance Levels

Support Level Broken - Support Level Becomes Resistance Level

Bitcoin prices rose again later. But they stopped below the old support level. That spot turned into resistance now.

In trading Bitcoin, when a support zone is taken out, the stop loss orders placed below that level are also taken out thus reducing the overall momentum that the previous Bitcoin buyers had. This gives an opportunity to sellers to short Bitcoin and then place their stop loss orders just above this technical level which has now turned in to a resistance level.

As long as this resistance level holds and prices don't move above this new resistance area then the market sentiment is bearish and the prices are likely to continue heading downwards. All in all the BTCUSD traders who will have opened sell trades will place their stop losses a couple of pips above this technical level.

When Resistance Levels Break - Transition of Resistance Zone to Support Area

In the example illustration displayed below the resistance level shown was tested 2 times but couldn't hold during the third time - the buyers were able to push price past this level, thereby breaking the resistance area.

Trading Bitcoin Price Charts with Support and Resistance Levels

Resistance Zone is Broken - Resistance Level Becomes Support Area

When the price of Bitcoin broke the resistance area and moved above this technical level after a period of time the prices tried to move lower again but couldn't move lower than this level - this is because the resistance level had now turned into a support level. The prices were quickly pushed further upwards by the buyers(bulls) after testing this new support zone. This is what happens in Bitcoin trading, when a resistance level is broken it then turns in to a support zone.

Another reason Bitcoin prices didn't fall again is that sellers (bears) who had started short trades had their stop-loss orders, which were set above the resistance areas, triggered, thus reducing the sellers' (bears') strength.

Major Resistance Levels & Minor Resistance Level

Bitcoin charts form major or minor support and resistance zones.

Major Resistance and Support Areas

In important areas of resistance and support, the price will stay around those levels for a while, and it might either stay steady or form a rectangle pattern. This price level will be tested many times before either breaking through or holding, and the price won't go past this important resistance support area.

The above illustrations are good examples of major resistance/support zones. In the above illustrations the major resistance support zones were broken, in the previous tutorial, the major resistance support zones held & weren't broken.

Minor Resistance and Support Areas

Small areas of resistance/support are price levels where the price will briefly create these short-term minor resistance/support areas. Since these are small resistance/support areas, the price will quickly go past them.

Upwards Bitcoin Trend

A series of minor resistance/support levels whose general direction is upwards will be formed - these resistance and support levels will be used to draw the upward trendline. An example of how to draw an up-wards trend-line using these support and resistance levels will be shown in the next tutorial on how to draw trend lines.

Downwards BTC/USD Crypto Currency Trend

A series of minor resistance/support levels whose general direction is downwards will be formed - these resistance and support levels will be used to draw the downward trendline. An example of how to draw a downward trend line using these support and resistance levels whose general direction is downwards will be displayed and shown in the next tutorial on how to draw trendlines.

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