Price charts are not just fluctuations of numbers, but the truest mirror of market sentiment.
When I first got into trading, a senior pointed to a seemingly unremarkable horizontal line on the screen and said, 'This is the line where the bulls and bears are contesting.' At the time, I didn't fully understand the deeper meaning of this statement, until many years of practical experience later, I realized that support and resistance are not just simple price markers, but a vivid reflection of the collective psychology of the market.
Today, I will share my essential understanding of these key points and how to apply them in practice.
1. The essence of support and resistance: the collective memory of market psychology
The logic behind support and resistance levels isn't complicated. Imagine what would happen in the market if Bitcoin dropped to $60,000 again? Those who missed the last buying opportunity would see this as a good time to get on board, while those who bought in at this level before might choose to add to their positions to average down their costs.
The formation of this consensus is essentially a manifestation of collective market memory.
The same applies to resistance levels. When prices rebound to previous highs, trapped investors are finally able to break even and are eager to sell and close their positions; at the same time, rational investors will also believe that prices are already high and will not chase the price higher. This ebb and flow of power between buyers and sellers makes it difficult for prices to continue rising, forming a resistance zone.
Interestingly, these key levels exist not only at horizontal levels but also within trend lines. Connecting two rising lows forms an upward trend line, indicating that buying power is gradually increasing; conversely, connecting two falling highs forms a downward trend line, reflecting that selling power is dominant.
II. How to identify effective support and resistance levels
Identifying true support and resistance is far more complex than simply drawing a few lines on a chart. I've summarized a few key elements:
The more times a price is tested, the more important that price level becomes. If a price level is repeatedly tested but not broken, it indicates high market acceptance of that level. It's like a door that remains intact despite repeated impacts, demonstrating its exceptional sturdiness.
The longer the time span, the more significant the support and resistance levels become. Historical highs and lows from months or even years ago often become key reference points in future trading. The market's memory lasts much longer than we imagine.
Trading volume is a key indicator for confirming the validity of a breakout. A genuine breakout is often accompanied by a significant increase in trading volume, while a false breakout is usually accompanied by flat trading volume. This is similar to determining whether a battle is a feint or a full-scale attack; you can tell by the amount of troops deployed.
Round numbers and psychological milestones naturally act as support and resistance levels. Round numbers like $60,000 for Bitcoin and $3,000 for Ethereum become psychological anchors for traders.
III. The Shift in the Roles of Support and Resistance: A Reversal in Market Sentiment
In the market, there is no eternal support or resistance. Once a key support level is effectively broken, it often turns into a new resistance level; conversely, a resistance level, once broken, becomes a new support level.
Behind this role reversal lies a change in the psychology of market participants. When a support level is broken, all investors who bought at that level are trapped. When the price returns to that level, these sellers eager to break even will create enormous pressure, turning what was originally support into resistance.
Understanding this is crucial for practical application. It means we need to view key positions on charts dynamically, rather than mechanically adhering to past judgments.
IV. Practical Application: My Personal Trading Strategy
In actual transactions, I follow these principles:
Distinguish between primary and secondary trends and their corresponding key levels. Support and resistance levels within the primary trend are of greater importance, while key levels within the secondary trend can serve as a reference for short-term trading.
Look for buying opportunities in support zones and selling opportunities in resistance zones. This sounds simple, but it requires resisting the urge to "chase highs and sell lows" and patiently waiting for prices to return to these key areas before taking action.
Breakout trading requires confirmation of its validity. When the price breaks through a key resistance level, I wait for the price to pull back and confirm that the resistance level has turned into a support level before considering entering the market. Although this may mean missing out on some profits, it significantly increases safety.
Always set a stop-loss order. Whether I'm going long at a support level or short at a resistance level, I always set the stop-loss order on the opposite side of the key level to prevent misjudgment.
V. Psychological Preparation: More Important Than Technical Analysis
Technical analysis is important, but the key to successful trading often lies in psychological fortitude. The market will do everything it can to make you make the wrong decision at the wrong time: that final false break before a support level is broken, that tempting false breakout before a resistance level is broken...
In my trading career, I've learned an important lesson: support and resistance analysis isn't a crystal ball for predicting the future, but rather a game of probability. No method is 100% accurate; what we need to do is find high-probability opportunities and manage risk effectively.
Conclusion: The market is always right.
Finally, I want to emphasize that support and resistance analysis are merely tools, not the end goal. When market movements contradict your judgment, remember—"the market is always right." Admitting mistakes promptly and conserving capital is far wiser than stubbornly clinging to your own opinions.
Trading is an art, and support and resistance analysis is like a painter's brush. Whether a beautiful picture can be created ultimately depends on the painter's skill, experience, and creativity. I hope my sharing can help you go further and more steadily on your trading journey.
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